Financial Stability Report
May 2011 Volume: 12
TÜRKİYE CUMHURİYET MERKEZ BANKASI Head Office İstiklâl Cad. 10 Ulus, 06100 Ankara, Türkiye
Tel: (90 312) 507 50 00 Fax: (90 312) 507 56 40 Telex: 44033 mrbrt tr; 44031 mbdı tr World Wide Web Home Page: http://www.tcmb.gov.tr E mail: [email protected], [email protected]
ISSN 1306 1232 ISSN 1306 1240 (Electronic)
This report, aimed at informing the public, is based mainly on March 2011 data. However, the report also includes developments and evaluations up to its date of publication in Turkish. The full version of this text is available on the CBRT website. The CBRT cannot be held accountable for any decisions taken based on information and data provided therein.
TÜRKİYE CUMHURİYET MERKEZ BANKASI
FOREWORD
Global turmoil has revealed the necessity for central banks to guard financial stability against economic imbalances and accumulated risks in addition to focusing on price stability. Accordingly, the Central Bank of the Republic of Turkey designed a new policy approach and started to implement it by the end of 2010 in order to contain the risks which had accumulated around financial stability due to accelerating short term capital inflows and credit expansion.
With the objective of achieving price stability, the Central Bank of the Republic of Turkey, one of the authorities responsible for financial stability in Turkey, continues to monitor potential macro financial risks in the economy and employ the policy tools it holds against such risks, as it has done so far. Primary financial stability objectives are determined as the use of more equity capital, more prudent borrowing, longer maturities for borrowing, a strong FX position and effective risk management. Ensuring financial stability along with price stability requires the use of more than one policy tool. In this context, the Central Bank has diversified policy tools and started using tools such as required reserve ratios and the interest rate corridor beside the policy rate in a mutually complementary manner.
In the post crisis period, while advanced economies had to cope with persisting problems especially in the labor market and public finance, emerging economies faced strong growth, intensive capital inflows and rapid credit expansion, accompanied by concerns about overheating in some of them.
In current economic conditions, distinguishing between “overheating” and “excessive borrowing” is essential for sound evaluation of the Central Bank’s policies. On the back of weak foreign demand as opposed to the strong growth performance experienced in Turkey in 2010, capacity utilization rates lagged behind pre crisis levels. Therefore, the measures we have taken so far in the context of the new policy mix are primarily aimed at excessive borrowing.
I hope that the twelfth volume of our Financial Stability Report, which includes an analysis of recent developments and the identification of risks in a period that has been dominated by growing uncertainties abroad, will be beneficial to all readers.
Erdem BAŞÇI
Governor
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CONTENTS
Contents i
Overview iii
I. International Developments 1
II. Domestic Economic Outlook 9
III. Risks and Developments in the Banking Sector 25
IV. Financial Infrastructure 43
V. Special Topics 55
V.1. Limiting Volatility in the Credit Market 55
V.2. Stress Testing Methodology 58
V.3. Non Core Liabilities as a Systemic Risk Indicator 61
V.4. Transfer of the Activities of the Central Bank Risk Center to the Banks Association of Turkey 63
V.5. Interest Free Banking at a Glance 67
V.6. The Maturity Structure of Deposits 71
V.7. Bond and Bills Issued by the Banking Sector 73
V.8. The Institutional Framework Regarding Macroprudential Policies 75
V.9. The Impact of Global Liquidity Ratios on Central Bank Operations 82
V.10. Central Counterparties (CCPs) 89
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OVERVIEW
Global economic conditions display a more positive outlook compared to the previous reporting period on the back of measures taken to improve economic activity especially in advanced economies following the crisis. However, these policy measures caused significant deterioration in the budget deficits of advanced economies.
Based on divergence of countries with respect to interest rates and long term growth potential, domestic demand has accelerated on the back of capital flows towards emerging economies, which have recently gained impetus, and increased the risk of excessive borrowing in these countries. Considering the risk of a potential sudden change in capital movements, country authorities continue to implement macroprudential policy mixes. The policy framework that has been designed embodies a countercyclical objective, capable of ensuring medium and long term sustainable growth in economies, in addition to efforts to prevent vulnerabilities that may arise from excessive borrowing. As a matter of fact, in addition to operational measures taken in the aftermath of the crisis, both advanced and emerging economies have embarked on significant changes in their institutional structures with regard to financial stability.
In the upcoming period, advanced economies are expected to implement their exit strategies gradually, based on developments in their growth and inflation. This situation might have limited impact on global growth rates, whereas it might affect international capital movements in the extent of volatility it would cause in terms of investment decisions. Furthermore, the increased default risk in some European Union countries increases the risk of contagion especially in economies with debt securities of the said EU countries in their portfolio. Meanwhile, the impacts of developments in the Middle East and North African countries on the global economy through the channel of energy prices should be monitored carefully.
Capital inflows to Turkey, which has relatively stronger economic fundamentals among emerging economies, continued; the economy continued to grow on the back of domestic demand; unemployment rates declined while industrial production and capacity utilization increased. The rapid recovery in the economy has raised concerns about excessive borrowing in Turkey as in many other emerging economies. In the meantime, the capacity utilization rate remaining at low levels and production volume hovering below its potential due to weak external demand contain the pressures on inflation.
Although there is no overheating in the economy in terms of aggregate demand conditions, the divergence of growth rates of internal and external demand along with short term capital inflows bring concerns over financial stability to the forefront. In this context, considering the economic conditions peculiar to our country, the Central Bank of the Republic of Turkey (CBRT) implements a new policy mix consisting of low policy rate, a wide interest corridor and higher reserve requirement ratios, with a view to containing the rise in credits and current account deficit and reducing short term capital inflows to ward off concerns over financial stability.
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The impacts of our new policy mix have become visible. Following the measures taken, acceleration in the credit growth rate halted and the average maturity of deposits started to lengthen. The tightening impact of the new policy mix on credits is expected to become more pronounced in the upcoming period.
As it has been reiterated on several occasions, it is essential for both the public and private sector to avoid excessive borrowing, prefer longer maturities in all borrowings, opt for borrowing in Turkish lira as much as possible and manage risks appropriately in order to increase the effectiveness of these measures and to strengthen the resilience of our economy in the face of exogenous shocks.
Indicators related to the banking sector point to the financial soundness of the system. The improvement in credit conditions, low level of interest rates, declining unemployment rate and the increased debt service capacity of borrowers has reduced non performing loan ratios. Deposits continue to be the main funding source in the banking sector. Additionally, banks increase the funds they provide from abroad and find additional resources through issuance of bonds and bills.
The ongoing upward trend of the share of credits in banks’ portfolios due to increased credit supply on the back of the economic recovery has an impact on liquidity ratios as well. Although liquidity ratios started to decline in early 2010 on the back of the decrease in the securities portfolio and the increase in repos and debts to foreign banks, they hover above legal ratios. The surge in funds provided by banks from abroad contributes to the extension of maturities of liabilities. Meanwhile, it is essential for banks to monitor maturity matching in their borrowings through short term cross currency swap (CCS) transactions and to maintain effective risk management under current economic conditions dominated by rapid credit expansion.
Despite a slight decline in profitability ratios, which surged owing to increased competitiveness in contrast to the improvement in credit quality, the said ratios still hover at high levels. It is considered that thanks to price adjustments made, the profitability of the banking sector will not be as low as envisaged by the market during the rest of the year. On the other hand, although the capital adequacy ratio declined on the back of credit growth, it maintains its high level above the minimum and target ratios.
Within the framework of the aforementioned evaluations, the financial stability map, which illustrates developments related to financial stability in Turkey in a macro perspective, addresses the financial system with a holistic approach and enables comparison by quarters, is given below.
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Financial Stability Map 1
Global Economy 1,00
Banking Sector Global Markets 0,75
0,50
0,25 Household Sector Domestic Economy
0,00
Corporate Sector Domestic Markets
Public Sector Balance of Payments
12 08 09 10 03 11
(1) The closer to the center, the more stable the sector is. Analysis allows time series comparisons within each sector. Among the sectors, the comparison can be made in terms of the directional change in position with respect to the center. As also shown in the chart above, while risks related to the global economy and markets reduced slightly compared to the previous reporting period, credit and labor markets in advanced economies still lag behind pre crisis levels, causing persisting weakness in global economic activity.
With regard to Turkey, the general trend in sub items of the economy is improving. In line with the recovery in domestic economic activity, firms continue to increase their revenues from sales and maintain their strong profitability performance. Meanwhile, exchange rate risk remains important for firms. Households’ indebtedness remains on the rise in response to the revival of economic activity and increase in consumer confidence. Nevertheless, due to the decrease in the ratio of interest payments to disposable income and the increase in employment, the risk outlook for households continues to improve.
The easing of financial policy, which served as a shock absorber in the early stages of the crisis, did not last and public finance discipline was restored in the following period. From the balance of payments perspective, short term capital flows driven by global monetary expansion still constitute a risk factor. In the period ahead, it is essential to increase public savings in order to curb risks stemming from short term capital flows which might potentially remain strong, the high level of credit volume and the current account deficit caused by the divergence between internal and external demand. Balance of payments developments will be monitored closely in the face of significant uncertainties arising from global economic conditions.
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Meanwhile, within the context of financial stability, the Central Bank monitors developments in financial market infrastructures closely. Especially the rise in transaction volume in financial markets requires the use of effective and reliable payment and settlement systems. Recent experience gained from economic volatilities on a global scale has led countries to determine international standards related to financial infrastructure agencies. The Central Bank keeps a close watch on payment and settlement systems one of the cornerstones of a sound financial structure that contributes to maintaining financial stability if it functions properly and takes necessary measures to minimize any risks that may arise from these systems. Therefore, no problem was experienced due to payment and settlement systems during the period of financial turmoil.
Although the Central Bank’s monetary policy priority is price stability, it also adopts a framework that safeguards both price stability and financial stability while addressing risk factors and takes monetary policy measures related to these risks under current conditions. In this scope, how the Central Bank would use policy tools in the upcoming period is announced in the Inflation Report of April 2011 through scenarios developed in this context.
Analyses included in this volume of the Financial Stability Report reveal that the Turkish banking sector has maintained its resilience against endogenous and exogenous shocks. However, from a macro perspective, the rise in credits and the current account deficit engenders concerns over financial stability. The increase in credits and the current account deficit follow a parallel trend. Rapid credit growth fuels an increase in the current account deficit by feeding domestic demand and reducing savings ratios. Besides, the increasing share of short term capital inflows in financing the current account deficit has necessitated the adoption of the current policy approach.
Although it is expected that the credit growth rate in emerging economies, which are in the initial stages of financial deepening, would be higher than that of advanced economies, country cases suggest that important banking and balance of payments crises are related to rapid credit growth. In addition to the positive relationship between credit growth and the current account deficit, there is also a similar relation between the credit growth rate and credit growth rate volatility. High credit volatility also adds to the size of fluctuations in economic growth and imposes a risk on financial and macro stability. Therefore, reducing fluctuations in credits will support financial stability by reducing procyclicality in credit markets. Furthermore, it is always essential that banks maintain an effective risk management system while extending loans in robust and competitive credit markets.
The effects of measures taken by the Central Bank in the context of its new policy mix on credits and domestic demand became apparent from the second quarter on. However, both the high level of energy and other commodity prices and developments weakening external demand have postponed improvement in the current account balance to the final quarter of the year. The Central Bank will continue to monitor the impacts of the current policy mix on financial stability and will take additional measures when necessary.
Recent concerns especially over the sustainability of increasing public debt related to some Euro area countries has led to a relative decline in capital flows towards developing countries. In line with
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TÜRKİYE CUMHURİYET MERKEZ BANKASI this development, our daily amount of foreign exchange buying auctions was reduced from USD 50 million to USD 40 million.
If capital flows towards developing countries continue to weaken, the daily amount of foreign exchange buying auctions may gradually continue to be reduced. In such a case, as the amount of Turkish lira liquidity that will be provided to the market from this channel will also decline, with respect to credit growth, the need to make additional increases in reserve requirements will diminish in the second half of 2011.
Additional measures that might be taken by other authorities in coordination with the Central Bank will also reduce the need for additional increases in reserve requirement ratios in the upcoming period.
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I. INTERNATIONAL DEVELOPMENTS
The general conviction at international level is that global growth performance has improved and that the markets are not likely to see a second dip on the back of expansionary monetary and fiscal policies. Despite this positive outlook for the overall global economy, the apparent divergence between the growth performance of advanced and emerging markets brings about distinctive economic policies as well. Within this scope, emerging economies opt to contain the macro financial risks driven by accelerated capital flows using unconventional policy mixes. Meanwhile, advanced economies tighten their fiscal policies in order to restore the deteriorated public finances due to the measures taken in the aftermath of the crisis. The global macro economic implications of political unrest in the Middle East and the North Africa In the first quarter of 2011, and the natural disaster in Japan are expected to remain subdued.
The high level of budget deficits and public debt in advanced economies increase fragility by raising a need for funding in large amounts. Widening budget deficits in many advanced economies, primarily in Euro area (EA) states have increased the public borrowing need and hence the debt stock reached record highs (Chart I.1 and I.2).
Chart I.1. Debt Stock and Budget Deficit in Some Chart I.2. CDS in PIIGS Countries (basis points) Countries (% GDP) 120 8 1200 7 100 1000 6 80 800 5 60 4 600 3 40 400 2 20 200 1 0 0 0 Italy Spain 2008 2009 2010 2008 2009 2010 2008 2009 2010 Greece Ireland 2011* 2011* 2011* Portugal
Debt Stock Budget Deficit (right axis) 2009 2010 Source: IMF Source: Bloomberg * Forecast Concerns regarding debt sustainability in Portugal, Ireland, Italy, Greece and Spain (PIIGS) have increased borrowing costs particularly in the EA. While the debt stock in peripheral EA countries became unsustainable, concerns over capital and liquidity adequacy ratios of banking sectors of core EA countries, with PIIGS debt securities on their balance sheets, remain (Chart I.3). While the credit ratings for EA countries excluding Italy were lowered, the CDS’s were increased and these countries faced troubles with external borrowing. Against this background, Greece, Ireland and Portugal received fiscal stimulus from the EU and the IMF (Table I.1). The high level of interest expenses and the high burden imposed by nationalized banks exacerbate concerns about a potential restructuring of debts by these countries.
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Table I.1. PIIGS Countries Receiving Fiscal Chart I.3. Net Receivables of International Stimulus Banks from Certain Countries (Billion USD) 1,2 (Billion Euro) 1000 EFSF IMF Treasury Program 900 EFSM* Contribution Duration 800 700 Greece 80 30 3 years 600 500 Ireland 45 22.5 17.5 3 years 400 Portugal 52 26 3 years 300 200 Ratings (S&P) 100 0 2009 2010 2011
Italy Greece BBB+ BB+ B Spain Greece Ireland Portugal Ireland AA A BBB+
Portugal A+ A BBB 2007 2008 2009 2010 Source: BIS (1) Data for 2010 are provisional. Source: European Union Commission (2) Net receivables are calculated by subtracting all the receivables (*) European Financial Stability Fund and European Financial Stability (credits, securities, etc.) from PIIGS countries on balance sheets of banks Mechanism subjected to BIS reporting, from all liabilities (deposits, etc.) to these countries. The increased funding cost due to difficulties in accessing non-depository funds in addition to risks stemming from PIIGS bonds in the European banking sector increases the dependency of banks on central bank resources. Banks, whose funding costs have increased in line with higher sovereign risk on the back of problems in public finance, are oriented towards central bank resources to meet their funding needs (Chart I.4). Furthermore, contracting interest margins and declining profitability performance affect the financial structures of banks with unqualified and inadequate capital. Given the elevated level of debt that must be financed by banks in the short run, vulnerabilities of advanced financial markets still remain (Chart I.5).
Chart I.4. Liquidity Provided by the ECB to Banks Chart I.5. Debts of PIIGS Banks Maturing in (Billion Euro) 2011-12 (% Total Debt)
160 60
140 50 120 40 100 30 80 20 60 10 40
20 0
0 Italy Spain Greece Ireland Portugal 08.09 10.09 12.09 02.10 04.10 06.10 08.10 10.10 12.10 02.11 04.11 2011 2012 Source: ECB Source: IMF Within this scope, while the ECB maintained quantitative easing, it tightened its monetary policy stance through the interest rates. The ECB enlarged its balance sheet by purchasing the securities of distressed EA countries and increased the policy rate by 25 basis points for the first time in a long time in response to inflationary concerns in April 2011. On the other hand, the fact that the interest gap between the Fed and the ECB widened in favor of the euro leads to appreciation of the euro and therefore constitutes a risk on growth rates of EA countries. This situation hampers further increase in the ECB’s policy rate and implementation of its exit strategy.
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Despite the policies of the ECB; the Bank of England, the Fed and the Bank of Japan continue to stick to the expansionary monetary policies. While these three central banks continue to keep policy rates at record lows, they do not opt for a new quantitative easing. However, these central banks are not expected to launch their exit strategies in the near future (Chart I.6 and I.7).
Chart I.7. Balance Sheet Aggregates and Chart I.6. Policy Rates in Advanced Economies Inflation Rates of Central Banks of Advanced (%) Economies (Billion USD, %)
7 350 6 6 300 5 5 4 250 4 3 3 200 2 2 150 1 1 100 0 0 50 1
01.07 05.07 09.07 01.08 05.08 09.08 01.09 05.09 09.09 01.10 05.10 09.10 01.11 0 2 BoE ECB Fed BoJ USA Japan Euro Area UK Inflation rates for the period 2007 2007 2008 2009 2010 03.2011 03.2011 (right axis) Source: Country Central Banks Source: IMF
Asset prices increased, market interest rates decreased and volatility in the markets attenuated due to ample global liquidity driven by expansionary monetary policies of advanced economies. The low yields from debt securities increased the demand for financial products and resulted in further use of commodities as an investment instrument (Chart I.8). Stock markets regained their pre crisis highs owing to the increased risk appetite, whereas asset prices rose significantly. Prevailing concerns about the financial sector in the EA, along with those related to the earthquake and exports in Japan, led stock markets to underperform compared to US markets. While metal and gold prices increased to historically high levels, oil prices exhibited a rapid increase as well (Chart I.9).
Chart I.8. Bond Yields in Advanced Economies Chart I.9. Asset Market Indicators (%) (December 2007=100) 5.25 5.25 200 270
4.75 4.75 225 150 4.25 4.25 180 3.75 3.75 100 135 3.25 3.25 50 90 2.75 2.75
2.25 2.25 0 45
1.75 1.75 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11
MSCI Developing Country Index 12.07 04.08 08.08 12.08 04.09 08.09 12.09 04.10 08.10 12.10 04.11 MSCI Global Index US 10 year Government Bond S&P GS Energy Prices UK 10 year Government Bond S&P GS Non energy Commodity Prices Germany 10 year Government Bond VIX Source: Bloomberg Source: Bloomberg
The gradual recovery of demand, recently observed in advanced economies, is considered to be mainly due to the income and wealth effect rather than the credit
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channel. No significant recovery was observed in employment and household incomes in advanced economies, primarily in the USA, largely led by the increase in asset prices and tax rebates; however, these economies enjoyed an improvement and gradual growth in terms of domestic demand (Chart I.10 and I.11).
Chart I.10. Growth Rates in Advanced Economies Chart I.11. Unemployment Rates in Advanced (%, Annual) Economies (%, Annual) 6 12 4 11 10 2 9 0 8 7 2 6 4 5 4 6 3 8 2 2004 2005 2006 2007 2008 2009 2010 2004 2005 2006 2007 2008 2009 2010 2011* 2012* 2011* 2012*
Euro Area Japan UK USA Germany Japan UK USA
Source: IMF Source: IMF * Forecast * Forecast It is therefore considered essential that credit markets regain their pre-crisis effectiveness so as to ensure sustainable development in advanced economies. Nevertheless, vulnerabilities regarding credit supply prevail in advanced economies and the demand for credit has not reached the pre crisis levels yet (Chart I.12 and I.13). Due to low funding costs, some banks in Europe and the USA continue to bear low qualified assets on their balance sheets, expecting that the quality of these assets will improve in the future. Concerns about banks’ capital adequacy and sovereign risks increase funding costs, which, in turn, slow down the restoration of credit supply conditions to their pre crisis levels in Europe. Whereas the improvement in credit supply conditions is gradual and limited in the USA as well, the low demand puts downward pressure on credit growth.
Chart I.12. Development of Credits in the US Chart I.13. Development of Credits in the Euro Banking Sector (Billion USD, %) Area Banking Sector (Billion Euro, %)
12,000 14 12 10,000 14 10,000 10 9,000 12 8 8,000 8,000 10 6 7,000 8 4 6 6,000 6,000 2 4 5,000 0 2 4,000 4,000 2 0 2,000 4 3,000 2 6 2,000 4 0 8 1,000 6 0 8 01.02 12.02 11.03 10.04 09.05 08.06 07.07 06.08 05.09 04.10 03.11
Credit Volume Growth Rate (right axis) 01.02 12.02 11.03 10.04 09.05 08.06 07.07 06.08 05.09 04.10 03.11 Credit Volume Growth Rate (right axis) Source: Fed, ECB Source: Fed, ECB
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Another outcome of ample liquidity driven by expansionary monetary policies of advanced economies is the acceleration of capital flows towards emerging economies due to search for high yields. The slow recovery and low yields in advanced economies led to an increase in capital flows to emerging economies with a relatively stronger economic and financial structure. However, capital inflows slowed down in early 2011 on the back of increased geopolitical risks and macroprudential monetary policy measures (Chart I.14). In the meantime, capital flows are expected to continue for an extended period mainly because of, predictions that emerging economies will maintain their rapid growth performance, and the relatively low weight of developing country assets in the portfolios of institutional investors (Chart I.15).
Chart I.15. Capital Flows Towards Emerging Chart I.14. Flow of Funds Towards Emerging Economies by Type and REER (Billion USD, index Economies (Billion USD) 2000=100) 1
1,200 130
8.00 2.00 1,000 125 120 6.00 1.50 800 4.00 1.00 115 600 2.00 0.50 110 400 0.00 0.00 105 200 2.00 0.50 100 Investments on equity 0 95 4.00 and bonds decreased 1.00 respectively by 13,1 bln 6.00 1.50 200 90 and 2,2 billion USD. 8.00 2.00 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Direct Investment Portfolio Investment 01.10 02.10 03.10 04.10 05.10 06.10 07.10 08.10 09.10 10.10 11.10 12.10 01.11 02.11 03.11 Other Investment REER (right axis) Equity Government Bond (rhs) Source: IIF Source: IMF (1) Forecast for 2010, Projections for 2011 and 2012 REER: Real effective exchange rate Acceleration of capital flows increases the risks of developing countries that are exposed to, and, in turn, these countries intensify macroprudential measures. Capital flows caused appreciation of local currency, swelling in asset prices, rapid credit growth, increase of leverage ratios and deterioration in the current account deficit. In line with the measures taken, many countries launched policy mixes including reserve accumulation (such as Indonesia, Peru), increase of reserve requirement ratios (such as Brazil, China, India, Turkey), change in policy rates and direct capital controls (such as Brazil, Peru). On the heels of the crisis, emerging economies generally opted for decreasing policy rates in order to underpin the economic recovery. With the economic recovery and revival of international capital flows to these countries, their policy stances diverged. Accordingly, while a number of emerging economies raised interest rates so as to prevent overheating of the economy, others kept interest rates at low levels considering the rapid capital inflows. Additionally, countries that underwent rapid credit expansion started to use required reserves as a more active policy tool (Chart I.16 and I.17).
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Chart I.17. Change in Reserve Requirement Chart I.16. Change in Policy Rates in Emerging Ratios in Emerging Economies and Their Level Economies (Basis Points) (Points) 1 2 1,200 130
0 1,000 125 120 2 800 April 2011 115 4 600 March 2011 110 6 400 Feb 2011 105 8 200 Jan 2011 100 10 0 Sept 2007 95 Dec 2010 12 200 90 Peru Chile 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Brazil China Russia Poland Mexico Turkey S.Africa Hungary Thailand Malaysia Romania
Colombia Direct Investment Portfolio Investment Indonesia Other Investment REER (right axis) Source: Country Central Banks Source: Country Central Banks (1) Each grade shows the change in ratio, values indicated above bars
show the current level. Ample global liquidity and high growth rates led to a rapid credit expansion in emerging economies. Rapid credit expansion increases vulnerabilities of the banking sector in these countries (Chart I.18). Banks resort to further wholesale funding in order to finance the credits increasing parallel to high growth and domestic demand. As a matter of fact, with increased external borrowing facilities, banks in developing countries issued dollar indexed bonds at a record high of USD 110 billion in total throughout 2010 1. However, in the event of a massive capital outflow, banks in the said countries may face rollover risk. Meanwhile, some emerging economies started to accumulate reserves within the framework of macroprudential measures (Chart I.19).
Chart I.18. Credit Growth in Emerging Chart I.19. Current Account Balance and Official Economies (%) Reserve Changes in Emerging Economies (%) 1
45 60 Europe, 40 Asia S.Africa 50 Middle East 35 and Africa 30 40 25 30 20 20 15 10 10 5 0 0 10 India Brazil China Israel Peru Chile India Brazil Israel China Korea Turkey Russia Poland Mexico Turkey Thailand Malaysia S.Africa Colombia Argentina Hunagry Malaysia Colombia Indonesia Change in Official Reserves (2010, %) 2002 2009 average 2010 Current Account Balance (% GDP)
Source: IMF Source: IMF (1) Annual change in gross international reserves excluding gold. Current account balance data are 2009 data for some countries and 2010 data for others. Rapid credit expansion gave way to overheating signals in some economies. Certain countries faced the risk of overheating parallel to narrowing the output gap due to the improvement in economic activity and employment in emerging economies (Chart I.20). In countries, which were exposed to accelerated capital flows, the inflation trend started to rise on the back of increased domestic consumption against weak external demand (Chart I.21). Given the contribution of energy
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TÜRKİYE CUMHURİYET MERKEZ BANKASI cost to external deficit, the increase in global commodity prices adds to inflationary pressures. Increased oil and energy prices driven by the political unrest in the Middle East and North Africa, blurs the outlook for growth and inflation in these countries.
Chart I.20. Output Gap and Annual Credit Chart I.21. Inflation Rates in Country Groups Growth Rate in Emerging Economies (%) 1 (%) 15 10 9 10 8 7 5 6 5 0 4 3 5 2 Peru Korea Russia Poland 2004 2005 2006 2007 2008 2009 2010 S.Africa Malaysia Colombia
Indonesia Central and Eastern Europe Devoloping Asia Output Gap Annual Credit Growth (%) S.America
Source: IMF Global Financial Stability Report, April 2011. Source: IMF (1) Output gap is by 2010 and credit growth rate is by June 2010. In a general sense, although global economic conditions still remain weak, they are on a positive path owing to the measures taken to improve economic activity in advanced economies. However, the policy measures taken in the face of the crisis caused a significant deterioration in public finances; as a result, advanced economies resorted to fiscal discipline. Narrowing fiscal room for manoeuvre and the low rate of increase in credits restrain growth performance in advanced economies. According to international authorities, global growth, which regained its pre crisis levels thanks to emerging economies, is not likely to see a second dip. Meanwhile, capital flows that have accelerated recently on the back of the decoupling among countries in terms of interest rates and long term growth potential feed the risk of overheating in emerging economies. Considering potential setbacks in case of a sudden stop of capital inflows, policy makers continued to implement macroprudential policy mixes to cool down the economy. In addition to operational measures taken in the aftermath of the crisis, both advanced and emerging economies embarked on some changes in their institutional framework 2.
Advanced economies are expected to implement their exit strategies gradually in the medium and long run, based on their growth and inflation indicators. This situation is expected to have a limited impact on global growth rates; however, it might affect international capital movements to the extent of uncertainty it would create in terms of investment decisions. Furthermore, the increased default risk in PIIGS countries increases the risk of contagion especially to those countries having PIIGS debt securities on their portfolio. Meanwhile, the impacts of the developments in the Middle East and the North Africa countries on the global economy through the channel of energy prices should be monitored carefully.
2 Please refer to:Special Topic V.8. Institutional Framework Regarding Macroprudential Policies.
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II. DOMESTIC ECONOMIC OUTLOOK
The divergence between growth dynamics of advanced and emerging economies accelerates capital inflows to countries like Turkey, with relatively stronger economic fundamentals. While domestic demand driven growth continues, unemployment rates decline. These developments give way to concerns of overheating in Turkey, as in other emerging economies. However, the persisting low level of capacity utilization and moderate levels of services inflation suggest that there is no overheating in the economy. Nevertheless, indebtedness that surged on the back of accelerated capital inflows and credit expansion, the widening current account deficit resulting from the significant divergence between internal and external demand as well as the financing of this deficit by rather short term funds feed the risks related to financial stability, and may hamper price stability over the medium term. In order to ward off concerns over financial stability the Central Bank of Turkey has started to implement a new policy mix comprised of low policy rate, wide interest corridor and high required reserves in order to curb short term capital inflows and restrain the surge in credits and the current account deficit. The effects of our bank’s policies on short term capital movements, credit growth and domestic demand have started to be observed in the second quarter of the year. However, both elevated levels of energy and other commodity prices and weaker external demand outlook postpone the improvement in the current account balance to the last quarter. Meanwhile, the budget balance continued to improve on the back of increased tax revenues owing to economic revival and limited public expenditures. The Central Bank will continue to monitor the impacts of the current policy mix on credit growth and the current account balance closely and take additional measures if needed.
Economic growth driven by domestic demand continues. GDP increased by 5.2 percent and 9.2 percent year on year, in the third and fourth quarter of 2010, respectively (Chart II.1). The slowdown observed in the third quarter was temporary and there was a strong increase in economic activity in the last quarter. Thus, the national income, which had contracted by 4.8 percent in 2009, grew by 8.9 percent in 2010. The growth of GDP was mainly attributable to final domestic demand. In 2010, while the total share of final domestic demand in GDP growth was 10.9 points, with a breakdown of 4.7 points from private consumption expenditures, 6 points from investment expenditures and 0.2 points from public consumption, the shares of net exports and stock changes were –4.4 points and 2.5 points, respectively. Industrial production and capacity utilization data pertaining to the first quarter of 2011 reveal that the economy continues to grow. In the first quarter of 2011, industrial production and the capacity utilization rate increased by 14.2 points and 5.7 points, respectively, compared to the same period of 2010 (Chart II.2).
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Chart II.1. GDP and Its Components (%, Annual Chart II.2. Industrial Production and Capacity Contribution) Utilization
20 20 15 10 10 5 0 0 5 10 10
20 15 20 30 25 03.07 06.07 09.07 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11
Final Domestic Demand Stocks Industrial Production Index (%, yoy) Net Exports GDP Capacity Utilization Rate (year to year difference) Source: TURKSTAT Source: TURKSTAT, CBRT
The GDP is still below its potential and the capacity utilization rate is yet to reach its pre-crisis level. Rapid recovery in the economy has led to concerns of overheating in Turkey as well as in other emerging economies. However, the real GDP is yet to reach its potential levels due to the weak external demand (Chart II.3). Moreover, the low level of capacity utilization rates in the manufacturing industry, with its recent downward trend, indicates that the total demand is not high enough to put pressure on inflation (Chart II.4).
Chart II.4. Seasonally Adjusted Capacity Chart II.3. GDP and Its Trend Utilization Rate (%)
1.3 85 1.2 1.1 80 1.0 75 0.9 0.8 70 0.7 65 0.6 0.5 60
06.02 12.02 06.03 12.03 06.04 12.04 06.05 12.05 06.06 12.06 06.07 12.07 06.08 12.08 06.09 12.09 06.10 12.10 55
Real GDP Post crisis trend (WEO) 05.11 03.07 06.07 09.07 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 Pre crisis trend (2002 2007) Source: TURKSTAT, CBRT, IMF Source: TURKSTAT, CBRT Although unemployment rates are approaching pre-crisis levels, core inflation indicators continue to remain consistent with medium-term targets. According to seasonally adjusted figures, unemployment rates, which had increased due to the global turmoil and economic contraction, started to decline in the first quarter of 2009 and approached pre crisis levels in the first quarter of 2011, on the back of strong booms in employment (Chart II.5). Annual CPI growth remained low. While annual inflation was 4.3 percent in April 2011, core inflation indicators measured with H and I indices stood at 4.8 percent and 4.4 percent, respectively (Chart II.6). Annual inflation for H and I indices surged on the back of the rise in core goods prices stemming from the increase in imports prices and depreciation of the Turkish lira in the first four months of 2011. However, annual CPI inflation experienced a steep decline owing to the weakening of base effects from the January 2010 tax adjustments on fuels, alcoholic beverages and tobacco as well as the changes in unprocessed food prices and the favorable course of services prices. Especially the persisting low
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TÜRKİYE CUMHURİYET MERKEZ BANKASI levels of capacity utilization rate and moderate levels of inflation in the services sector signal that there is no overheating in the economy.
Chart II.5. Seasonally Adjusted Unemployment Chart II.6. Inflation (%) Rate (%)
16 14 12 15 10 14 8 13 6 12 4 11 2 10 0 9 12.07 04.08 08.08 12.08 04.09 08.09 12.09 04.10 08.10 12.10 04.11 02.11 03.05 06.05 09.05 12.05 03.06 06.06 09.06 12.06 03.07 06.07 09.07 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 CPI H Index I Index
Source: TURKSTAT Source: TURKSTAT The current account deficit continues to widen. The foreign trade deficit, which contracted on the back of the economic slowdown due to the global crisis and the fall in commodity prices and declined to USD 38.8 billion by the end of 2009, started to gain ground with the economic revival. Despite the recovery in exports, as a result of the acceleration of demand for imported goods, the foreign trade deficit reached USD 83.7 billion year on year in March 2011 and recovery paces of internal and external demand diverged further. As a result of these developments, export/import coverage ratio, which had been 72.5 percent at end 2009, declined to 58.8 percent in annual terms in March 2011 (Chart II.7). The current account deficit that had declined to 2.3 percent of GDP at end 2009 due to the global turmoil and economic contraction started to rise again with the economic recovery and reached 6.6 percent of GDP by the end of 2010. Increasing further in 2011, the current account deficit climbed from USD 48.4 billion in 2010 to USD 60.5 billion year on year in March 2011 (Chart II.8).
Chart II.7. Foreign Trade Balance Chart II.8. Current Account Balance
0 80 0 0 10 76 10 1 20 72 20 2 30 68 64 30 3 40 60 50 40 4 56 60 52 50 5 70 48 60 6 80 44 70 7 90 40 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 Annual, Billion USD Foreign Trade Balance (Annual, Billion USD) % GDP (R. hand axis) Exports/Imports (Annual, %) (R. hand axis) Source: TURKSTAT Source: TURKSTAT, CBRT While the share of portfolio investments and other investments in the financing of the current account deficit increases, that of direct investments decreases. Increased global liquidity on the back of expansionary monetary policies implemented by advanced economies in the
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aftermath of the global crisis accelerates capital inflows towards emerging economies. Capital inflows to Turkey also accelerated with the exit from the crisis and reached 6.4 percent of GDP by the end of 2010. This trend in capital flows also prevails in 2011. Net capital inflows, which had been USD 46.9 billion by the end of 2010, reached USD 53.2 billion year on year by March 2011. The capital inflows were composed of USD 23 billion of portfolio investments and USD 21 billion of other investments, while only USD 9.2 billion were from direct investments (Chart II.9). These figures reveal that short term resources gained weight in financing the current account deficit.
Chart II.9. Financing Structure of the Current Account Deficit Amount of Capital I nflows (Annual, Billion USD) 1 Capital Inflows (Annual, % GDP) 1
80 10 70 60 8 50 6 40 30 4 20 2 10 0 0 10 2 20 30 4 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10
Other Investments Portfolio Investments Direct Investments Portfolio Investments Direct Investments Capital Inflows Other Investments Capital Inflows
Source: CBRT (1) Capital inflows is composed of net direct investments, net portfolio investments and net other investments. Foreign exchange assets of banks and other sectors are not included in other investments. The upsurge in credits and current account deficit creates concerns over financial stability. Credit growth and the current account deficit follow a parallel trend (Chart II.10). Rapid credit growth is considered to cause widening in the current account deficit by strengthening domestic demand. Besides, the surge in the share of short term capital inflows in financing the current account deficit makes the economy more vulnerable to potential changes in capital flows. Although the credit growth rate in emerging economies, which are in the initial stages of financial deepening, is expected to be higher than that of advanced economies; country cases suggest that important banking and balance of payments crises are related to rapid credit growth. Furthermore, it is observed that there is both a linear and positive relation between the credit growth rate and credit growth rate volatility (Chart II.11). 3 High credit volatility also increased the size of fluctuations in economic growth and imposes a risk on financial stability. Therefore, reducing fluctuations in credits will support sustainability of growth by decreasing procyclicality in credit markets.
3 Please refer to: Special Topic V.1. Limitation of Credit Volatility. ______Financial Stability Report – May 2011 12
TÜRKİYE CUMHURİYET MERKEZ BANKASI
Chart II.10. Credit Growth and Current Account Chart II.11. Cred it Volatility and Average Credit Deficit (%) 1 Growth Rate by Countries (2002-2010) 1 35 14 Credit Growth Rate Volatility(%) 12 30
10 25 8 20 6
4 15
2 10 0 5 Average Credit Growth Rate (%) 2003 2004 2005 2006 2007 2008 2009 2010 03.11 0 Credit Growth / GDP 0 10 20 30 40 50 Current Account Deficit / GDP Source: BRSA-CBRT Source: IMF, CBRT Calculations (1) GDP figure for March 2011 is forecast. (1) In order to identify existence of a relation between credit growth rate and credit growth rate volatility, data (derived from the IMF database) regarding credits extended to private sector in 41 countries including Turkey, were used. In this framework, reserve requirement ratios were increased and differentiated according to the maturity structure of liabilities in order to curb the credit growth rate and to reduce the maturity mismatch between banks’ assets and liabilities. Reserve requirement ratios started to be used as an active policy tool since October 2010. Remuneration of the Turkish lira required reserves was terminated. Besides, reserve requirement ratios were differentiated set higher for shorter maturities from December so as to strengthen financial stability by lengthening the maturity structure of liabilities in the banking system (Chart II.12).
Chart II.12. Reserve Requirement Ratios (%) TL FX 18 13.0 TL RR Ratio FX RR Ratio 16 Demand, Notice, Private Current 12.5 Up to 1 Month FX dem. dep., notice deposits, priv.current acc., FX dep., FX part. 14 Acc.up to one month, up to 3 months, up to 6 months and up to Up to 3 Months 12.0 1 year maturitis and other FX liab. up to 1 year maturity 12 FX dep. and part. acc. with 1 year and longer maturity and other Up to 6 Months liab. longer than 3 year maturity Up to 1 Year 10 11.5 Other FX liab. 1 3 year maturity 1 Year and Longer 8 Other Liabilities 11.0
6 10.5 4 10.0 2 9.5 0 03.09.10 01.10.10 28.10.10 26.11.10 24.12.10 21.01.11 18.02.11 18.03.11 15.04.11 29.04.11 03.09.10 01.10.10 28.10.10 26.11.10 24.12.10 21.01.11 18.02.11 18.03.11 15.04.11 29.04.11 Source: CBRT
Furthermore, the Central Bank embarked on a policy of low policy rate and wide interest rate corridor in order to reduce short-term capital inflows. While the Central Bank decreased policy rates to curb short term capital inflows, it widened the interest rate corridor and increased the volatility of short term interest rates (Chart II.13 and II.14). These decisions aimed to extend the maturity of short term capital inflows as well as to prevent the Turkish lira from becoming detached from economic fundamentals.
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Chart II.13. CBRT Interest Rates (%) Chart II.14. Overnight Interest Rates
25 10
20 8 6 15 4
10 2
5 0
0 10.09.10 24.09.10 08.10.10 22.10.10 05.11.10 19.11.10 03.12.10 17.12.10 31.12.10 14.01.11 28.01.11 11.02.11 25.02.11 11.03.11 25.03.11 08.04.11 22.04.11 06.05.11 20.05.11
01.08 04.08 07.08 10.08 01.09 04.09 07.09 10.09 01.10 04.10 07.10 10.10 01.11 04.11 ISE Repo Reverse Repo CBRT Borrowing
ON Borrowing Rate Primary Dealer Repo CBRT Policy Rate ON Lending Rate 1 week repo rate ON SWAP Source: CBRT Source: CBRT Initial impacts of the policy mix have started to be observed. Following the measures taken by the Central Bank, the acceleration in credits growth ceased, loan interest rates saw limited increases, the average maturity of deposits started to extend 4 and the yield curve steepened (Chart II.15 and II.16). However, credit growth has not declined to reasonable levels for financial stability in the first quarter of 2011. Nevertheless, credit utilization is expected to slow down in the period ahead on the back of the lagged effect of monetary tightening.
Chart II.15. Weighted Average Maturity of TL Chart II.16. Savings Deposits Yield Curve (%) Deposits and FX Deposit Accounts (Day)
90 10.0
80 9.5
70 9.0
60 8.5 8.0 50 7.5 40 7.0 30 6.5 Up to 1 Up to 3 Up to 6 Up to 12 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 04.11 month months months months TL Deposits FX Deposits 25.12.09 06.05.11
Source: CBRT Source: CBRT While monetary policy revealed a tight stance; faster than expected recovery of economic activity, public expenditures under control and the decline in interest expenses had a positive impact on public finance balance. In 2010, budget revenues increased on the back of the surge in domestic demand, interest expenses decreased with the fall of interest rates and primary expenditures rose relatively modestly. As a result, budget performance followed a positive trend and central government primary surplus, which had been TL 440 million in annual terms by the end of 2009, increased to TL 8.7 billion at end 2010. Central government budget deficit fell from TL 52.8 billion in 2009 to TL 39.6 billion in 2010. Thus, the budget deficit that had reached 5.5 percent of the GDP in 2009 declined to 3.6 percent in 2010 thereof. The improvement in the budget performance continues in the first four months of 2011. While tax revenues that increased in this period, coupled
4 Please refer to: Special Topic V.6. Maturity Structure of Deposits. ______Financial Stability Report – May 2011 14
TÜRKİYE CUMHURİYET MERKEZ BANKASI with the decline in interest expenses had a positive contribution to budgetary developments, the slowdown in the growth rate of primary expenditures supported the improvement in budget performance. Thus, the primary budget surplus was up to TL 16.2 billion year on year, whereas budget deficit was down to TL 26.9 billion by April 2011 (Chart II.17 and II.18). Containing public expenditures should be evaluated as a development supporting financial stability. Adherence to fiscal discipline in the medium term is important in terms of ensuring its continuance and sustainability of the relative improvement in our sovereign risk.
Chart II.17. Primary Budget Balance Chart II.18. Budget Balance
45 5.0 0 0.0 40 4.5 10 1.0 35 4.0 3.5 30 20 2.0 3.0 25 2.5 20 30 3.0 2.0 15 1.5 40 4.0 10 1.0 5 0.5 50 5.0 0 0.0 60 6.0 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 04.11 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 04.11
Primary Budget Balance (Annual, Billion TL) Budget Balance (Annual, Billion TL) Primary Budget Balance/GDP (%) (R. hand axis) Budget Balance/GDP (%) (R. hand axis) Source: Ministry of Finance Source: Ministry of Finance Faster than envisaged recovery in economic activity and the limited rise in primary expenditures from the last quarter of 2009 affected public debt stock indicators positively. The rate of increase of central government debt stock, which had increased by 16.1 percent in 2009 to reach TL 441.5 billion, slowed down and increased by 7.3 percent in 2010 to reach TL 474 billion by year end. Thus, the ratio of debt stock to GDP that had increased to 46.3 percent in 2009, declined to 42.9 percent in 2010 (Chart II.19). This positive outlook prevailed in the first quarter of 2011 as well. 74.1 percent of central government debt stock, which rose by 7 percent in annual terms to reach TL 486 billion by March 2011, is composed of domestic debts. As to the composition of domestic debt stock, the share of TL denominated fixed rate debts and CPI indexed debts increased in 2010 and 2011. In March 2011, the share of TL denominated fixed rate debts in domestic debt stock increased by 5.6 points to become 49.5 percent and CPI indexed debts increased by 7.2 points to become 16.2 percent, compared to end 2009. Moreover, the maturity of domestic debt stock also increased from 24 months in 2009 to 34 months in March 2011 (Chart II.20). The decline in the share of FX denominated and FX indexed stock reduces sensitivity to exchange rate risk while the increase in the share of fixed income securities and extension of maturities reduces sensitivity to interest rate hikes, therefore both of them should be evaluated as a positive development.
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Chart II.19. Central Government Debt Stock Chart II.20. Composition of Domestic Debt Stock
600 47 120 37
500 45 100 32 400 43 80 27 300 41 60 22 200 39 40
100 37 20 17 0 35 0 12 12.07 12.08 12.09 12.10 04.11
12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 04.11 TL Fixed Rate TL Variable Rate Billion TL CPI Indexed % GDP (R. hand axis) FX/FX Indexed Maturity (months) (R. hand axis) Source: Undersecretariat of Treasury Source: Undersecretariat of Treasury Borrowing costs of the public sector hover below the pre-crisis levels. The treasury discounted auction interest rate displayed a downward trend from early 2009 and is still at low levels despite increases in February and March 2011. The rate that was 8.9 percent as of March 2011 stands at 2 percent after being adjusted for 12 month inflation expectations (Chart II.21). The Eurobond interest rate to mature in 2036, which was 5.8 percent in December 2010, increased to 6.5 percent as of March 2011 on the back of concerns driven by the political unrest in MENA region and overlapping of oil price hikes with the widening of the current account deficit in Turkey. However, it still hovers somewhat below the pre crisis level (Chart II.22).
Chart II.21. Treasury Discounted Auction Chart II.22. Eurobond Interest Rates 1 Interest Rate 25 11 700 10 600 20 9 500 8 15 7 400 6 10 300 5 200 4 5 3 100
0 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11
Eurobond Interest Rate (2036, %) 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 Eurobond Spread (2036, basis points) (R. hand axis) Interest Rate (%) Real Interest Rate (%)
Source: Undersecretariat of Treasury, CBRT Source: Undersecretariat of Treasury (1) Eurobond yield spread is calculated by taking into account the US bond yields with same maturity. Corporate sector debt increases while the share of their foreign borrowing decreases. While no significant change was observed in corporate sector total financial debt in 2009, it increased gradually in 2010 and became TL 461 billion by February 2011. Consequently, the ratio of the corporate sector financial debt to GDP increased by 2.9 points year on year at end 2010 and reached 39.1 percent (Chart II.23). As of February 2011, 59 percent of corporate sector financial debt was denominated in foreign currency; however, the majority of this debt was long term. In the same period, the share of foreign borrowing in total loans was 29.2 percent, whereas the share of loans extended to the corporate sector by domestic and foreign branches and affiliates of Turkish banks in
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TÜRKİYE CUMHURİYET MERKEZ BANKASI total loans increased by 1.8 points compared to September 2010 and reached 79.8 percent (Chart II.24).
Chart II.23. Financial Debt of Corporate Sector Chart II.24. Composition of Financial Debt (%) 1 (Billion TL, %) 1 500 40 100 450
400 35 80 350
300
250 30 60
200
150 40 25 100
50 20 0 20
12.07 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 01.11 02.11 0 Financial Debt (Billion TL) Financial Debt /GDP (%) (R. -hand axis)
12.07 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 01.11 02.11
Domestic TL Loans Domestic FX Loans External Debt
Source: CBRT Source: CBRT (1) Data for February 2011 are provisional. (1) Data for February 2011 are provisional.
After the amendment to Decree No. 32 in June 2009, firms shifted their credit utilization towards the domestic market and the external loans rollover ratio has displayed an upward trend since end-2010. Between June 2009, when Decree No.32 was amended, and February 2011, the amount of loans extended to the corporate sector by foreign branches and affiliates of Turkish banks decreased by USD 9 billion, whereas loans extended by foreign banks declined by USD 6.4 billion. On the other hand, FX loans extended by domestic branches of banks, increased by USD 43.9 billion (Chart II.25). According to balance of payments data, the external debt rollover ratio of non banks was 171 percent as of March 2011; however, taking into consideration the increase in the volume of FX loans extended by domestic branches, the ratio is realized as 239 percent. The rapid increase in the external debt rollover ratio in March 2011 compared to end 2010 was mainly attributable to the surge in long term external borrowing (Chart II.26).
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Chart II.25. Non -Bank Sector Net FX Borrowing Chart II.26. Non -Bank Sector External Debt (Billion USD) 1 Rollover Ratio (%) 1
4.5 300
3.5 250 2.5 200 1.5 150 0.5 100 0.5
1.5 50
2.5 0 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 Rollover Ratio External Net Borrowing Domestic Net Borrowing Adjusted Rollover Ratio Source: CBRT Source: CBRT (1) Corporate sector net FX borrowing is computed by subtracting (1). The external debt rollover ratio is computed from the balance of repayments from borrowings in the respective month. payment statistics, by dividing non banks’ borrowing with repayments. The external debt rollover ratio of non banks, which decreased due to the amendment to Decree No: 32, has been re calculated by taking into account the rise in FX loans extended by domestic branches of Turkish banks and the rise in repayments to domestic branches of Turkish banks.
In addition to the rise in borrowing, corporate sector revenues from sales have also increased. While total amount of sales revenues of firms quoted on the Istanbul Stock Exchange (ISE) increased by 25 percent year on year in March 2011, operating profits increased by 28 percent; however, net profits decreased by 13.1 percent. Despite higher sales revenues and operating profits of firms, financial expenditures that increased on the back of increased provisions for exchange rate movements were instrumental in the decline of the net profit (Chart II.27). As a result of these developments, the return on equity, which was 3.72 percent in March 2010, declined to 2.95 percent in March 2011 (Table II.1). The decrease in the profit margin was influential on the decline of return on equity of firms. The surge in financial expenditures, which are excluded from operating profits, affected their profit margin negatively.
Chart II.27. Sal es and Profitability of Firms by Table II.1. Return on Equity and Its March 2011 (Annual % Change) 1 Components 1 Mar.10 Mar.11 30 25 Net Profit / Equity (%) 3.73 2.95 20 Assets / Equity 2.07 2.13 15 10 Net Profit / Assets (%) 1.80 1.38 5 Sales / Assets 0.23 0.25 0 5 Net Profit / Sales (%) 7.87 5.45 10 Operating Profit / Sales (%) 8.00 8.15 15 20 Financial Income (Expenditures) / Sales (%) 1.47 -1.31 Sales Operating Profit Net Profit
Source: PDP Source: PDP (1) Consolidated data of 227 manufacturing industry firms quoted on the (1) Consolidated data of 217 manufacturing industry firms quoted on the ISE . ISE.
The FX assets and liabilities of firms suggest that the net FX short position has increased and currency risk still remains important for them. The net short position of the corporate sector, which started to decrease after the global crisis, assumed an upward trend with the
______Financial Stability Report – May 2011 18
TÜRKİYE CUMHURİYET MERKEZ BANKASI economic recovery. The FX short position that declined by 2.5 percent year on year in 2009 increased by 28.6 percent in February 2011 and reached USD 100.1 billion (Chart II.28). As of February 2011, the ratio of FX assets to FX liabilities went down by 1.6 points from the last quarter of 2010 and declined to 47 percent (Chart II.29).
Chart II.28. Foreign Exchange Position of the Chart II.29. FX Assets to FX Liabilities of the Corporate Sector (Billion USD) 1 Corporate Sector (%) 1
0 56
20 54 40 52 60 50 80
100 48
120 46 12.07 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 02.11 12.07 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 02.11
FX Net Position FX Assets / FX Liabilities
Source: CBRT Source: CBRT (1) Data for February 2011 are provisional. (1) Data for February 2011 are provisional. While household liabilities increased, the ratio of interest payments to disposable income decreased. The rebound in economic activity and increased consumer confidence boost the demand for consumer loans; as a result, household indebtedness continues to rise. The ratio of household liabilities to GDP, which had been 15.4 percent in 2009, went up to 17.3 percent in 2010 (Chart II.30). However, household disposable income increased owing to the recovery in the labor market and their borrowing costs dropped on the back of lower interest rates on loans. Thus, the ratio of household interest payments to disposable income, which had been 5.2 percent in 2009, declined to 4.4 percent in 2010 (Table II.2).
Table II.2. Household Disposable Chart II.30. Household Liabilities Income/Liabilities and Interest Payments (%, Billion TL) 1 (Billion TL) 1,2,3 2008 2009 2010 220 20 200 18 Household Disp. Income 352.8 408.9 463.9 180 16 160 14 Household Liabilities 128.9 147.1 191.1 140 12 120 10 Household Interest Payments 19.7 21.1 20.4 100 8 Interest Paym. / Hh. Disp. 80 5.6 5.2 4.4 60 6 Income (%) 40 4 Liabilities / Hh. Disp. Income 36.6 36 41.2 2 (%) 20 0 0 Source: BRSA-CBRT, TURKSTAT, SPO (1) Household liabilities consist of gross consumer credits and credit card 06 07 08 09 10 03.11 balances extended by banks and consumer finance companies (including NPLs) and liabilities to TOKI due to TOKI’s housing sales with long term Liabilities (Billion TL) maturity. Liabilities/GDP(R. hand axis (2) As the repayments related to liabilities from TOKI’s housing sales with long term maturity are indexed to civil servant salaries, they are not included in interest payments. Source: BRSA-CBRT, TURKSTAT (3) Household disposable income has been calculated by using the private (1) Household liabilities consist of gross consumer credits and credit card sector disposable income estimation for 2010 as mentioned in the 2011 balances extended by banks and consumer finance companies (including Annual Program, assuming that the ratio of household disposable income NPLs) and liabilities to TOKI due to TOKI’s housing sales with long term for 2009, which was generated from the Income and Living Conditions maturity. Survey, to private sector disposable income has not changed.
Financial Stability Report – May 2011 ______19
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While the share of other and housing loans within household liabilities has increased, that of vehicle loans has increased modestly and the share of credit cards has decreased. When the development of household liabilities is analyzed by type, it is observed that other loans increased by 53 percent, housing loans went up by 42 percent, vehicle loans surged by 43.6 percent and credit card balances increased by 18.4 percent in March 2011 compared to end 2009 figures. As a result of these developments, while the share of other loans, housing loans and vehicle loans within household liabilities increased, that of credit cards decreased (Chart II.31). Although credit card balances continued to rise in 2010 and 2011, the ratio of credit card balances that incur interest charges to total credit card balances declined compared to end 2009 (Chart II.32).
Chart II.31. Decomposition of Household Chart II.32. Credit Card Balances of Deposit Liabilities (%) 1,2,3 Banks and Balances that Incur Interest Charge 1
100 45 45 90 23.2 40 40 28.7 31.1 31.7 34.0 80 34.9 35 35 70 30 30 60 30.3 25 25 27.8 28.2 27.8 24.8 23.7 50 20 20 15 15 40 11.5 7.6 5.7 4.4 4.6 4.5 10 10 30 5 5 20 35.0 35.8 35.0 36.1 36.6 36.9 0 0 10 0 03.06 06.06 09.06 12.06 03.07 06.07 09.07 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 06 07 08 09 10 03.11 Credit Card Balances Incurring Interest Charge Credit Cards Housing Loans Vehicle Loans Credit Cards Other Ratio (R. hand axis) Source: CBRT-BRSA Source: CBRT (1) Household liabilities consist of gross consumer credits and credit card balances extended by banks and consumer finance companies and liabilities to TOKI due to TOKI’s housing sales with long term maturity. (2) Liabilities to TOKI due to TOKI’s housing sales with long term maturity are also included in housing loans. (3) Other loans consist of all consumer loans excluding housing and vehicle loans.
The number of consumer loan and credit card defaulters has decreased while the share of utilization of bank and credit cards in expenditures has increased. According to the Central Bank Risk Center data, the number of consumer loan and credit card defaulters, which was 1,721,004 at end 2009, decreased to 1,626,024 by March 2011 (Table II.3). The ratio of expenditures by bank and credits cards in private final consumption expenditures was 18.8 percent in 2006, this ratio increased gradually over years and though with a lower rate of increase in 2010, it reached 28.2 percent (Chart II.33).
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Chart II.33 Expenditures by Bank and Credit Table II.3. Number of Credit Card and Consumer Cards and Consumption of Resident Households Loan Defaulters 1 (Billion TL, %) 1 2008 2009 2010 03.11 1,000 30 Banks 997,095 1,489,131 1,319,111 1,254,737 800 25 Asset Management 139,862 330,156 574,541 578,475 20 600 Companies 2 15 Finance 400 21,884 23,463 18,003 17,324 Companies 10 200 5 Total 3 1,093,474 1,721,004 1,689,788 1,626,024 0 0 06 07 08 09 10 Expend. By bank and credit cards
Consumption of resident households Expend.by bank and credit cards/consump. of resident hh. (R. hand axis) Source: CBRT Source: TURKSTAT, ICC (1) Customers with more than one registry to a particular financial (1) In order to calculate the amount of expenditures by bank and credit institution group are counted only once. cards amounts derived from domestic and external utilization of bank and (2) Represents non performing loans taken over by asset management credit cards issued in Turkey are used. companies from the SDIF and banks. (3) As customers may have registry to more than one financial institution group, the sum of the three rows in the table and grand total are not equal .
Household liabilities do not bear interest rate and exchange rate risk. Most household liabilities in Turkey are denominated in Turkish liras. As households in Turkey are not allowed to borrow in foreign currency as per the amendment to Decree No. 32 in June 2009, the share of FX indexed credits decrease gradually and households do not take on FX denominated debts. The ratio of FX indexed consumer loans to total consumer loans, which was 3.4 percent in 2009, decreased to 1.6 percent at end 2010 and went down to 1.3 percent in March 2011 (Chart II. 34). Besides the low level of exchange rate risk they are exposed to, most of the loans granted to households do not bear a significant interest rate risk, as they are fixed rate loans.
Chart II.34. FX-Indexed Consumer Loans and Chart II.35. Household Financial Assets and FX-Indexed Housing Loans (Million TL, %) Liabilities (Billion TL, %)1
5,000 10 500 50 9 450 45 4,000 8 400 40 7 350 3,000 6 35 300 5 30 250 2,000 4 25 200 3 150 20 1,000 2 100 15 1 10 0 0 50 0 5 06 07 08 09 10 03.11 06 07 08 09 10 03.11 FX Indexed Consumer Loans FX Indexed Housing Loans Total Liabilities FX Indexed Cons.Loans/Total Cons. Loans (R. hand axis) Total Assets FX Indexed Housing Loans/Housing Loans (R. hand axis) Liabilities/Assets (R. hand axis) Source: BRSA-CBRT, CMB, CRA (1) Household Assets = Savings Deposits +FX Deposits + Currency in Circulation + GDDS + Eurobonds + Stocks + Repos + Pension Funds + Source: CBRT-BRSA Mutual Funds (since December 2006). Household liabilities consist of
gross consumer credits (including NPLs) and credit card balances (including NPLs) extended by banks and consumer finance companies and liabilities to TOKI due to TOKI’s housing sales with long term maturity. The ratio of household liabilities to assets has increased. The ratio of household liabilities to financial assets, which had declined slightly during the crisis, increased to 39.7 percent due to liabilities rising faster than assets in 2010 and went up to reach 40.7 percent by March 2011
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(Chart II.35). The total assets of household, which was TL 420 billion in 2009, surged to TL 482 billion in 2010 and to TL 503 billion in March 2011. The share of TL deposits, which constitutes the largest portion of household assets, went up in 2010 and 2011 compared to 2009. The share of FX deposit accounts in financial assets declined compared to 2009. Accordingly, the ratio of TL investment instruments to FX investment instruments increased compared to end 2009. Moreover, the share of government securities and Eurobonds decreased due to their low yields, while the share of equities and private pension funds increased (Table II.4 and Chart II.36).
Table II.4. Composition of Household Financial Chart II. 36. Ratio of Household TL Investment Assets (Billion TL, %) 1 Instruments to FX Investment Instruments 1 2009 2010 03.11 4.2 4.2 4.0 4.0 Billion TL Share Billion TL Share Billion TL Share 3.8 3.8 3.6 3.6 TL Deposits 209.6 49.9 253.8 52.7 266.9 53.1 3.4 3.4 FX Deposits 98.2 23.4 96.9 20.1 96.3 19.2 3.2 3.2 FX 3.0 3.0 Deposits 65.2 62.7 62.3 2.8 2.8 (Billion USD) Currency in 2.6 2.6 35.4 8.4 44.6 9.3 47.1 9.4 Circulation 2.4 2.4 GDDS+Euro 14.1 3.3 9.4 2.0 10.1 2.0 2.2 2.2 bond 2.0 2.0 Mutual 26.1 6.2 28.5 5.9 28.7 5.7 1.8 1.8 Funds Stocks 24.6 5.9 32.6 6.8 35.8 7.1 1.6 1.6 Private Pension 9.0 2.1 12.1 2.5 12.4 2.5 Funds 12.06 03.07 06.07 09.07 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 Repos 2.3 0.5 1.5 0.3 1.9 0.4 Precious (a) (b) Metal 1.1 0.3 2.3 0.5 3.3 0.7 Deposits Source BRSA-CBRT, CMB, CRA Total 420.4 100 481.7 100 502.5 100 (1) TL Instruments = Deposits + Repos + GDDS. + Participation Funds Assets (TL) + Stocks + Private Pension Funds + Mutual Funds (starting from April Source: BRSA-CBRT, CMB, CRA 2006); FX Instruments = FX Deposits + GDDS. + Eurobond, (a) Current TL (1) TL and FX deposits include participation funds. value of FX deposits and Participation Funds (FX). (b) For FX deposits and Participation Funds (FX), exchange rate prevailing on 29.12.2006 is used and the parity effect is eliminated. In the forthcoming period, the vulnerability of financial stability might increase in the face of short-term capital inflows that may remain strong, high growth rate in credit volume and persistent expansion in the current account deficit. While downside risks regarding the global economy persist, upside risks become important as well. Uncertainties over sustainability of debt dynamics and problems regarding credit, real estate and labor markets prevail in many developed countries. Besides, hikes in oil prices also impose a downside risk on the pace of global economic recovery. Short term capital inflows might remain strong in the case of a slower than expected recovery in advanced economies, hence the rise in credits and the current account deficit may continue. Meanwhile, faster than expected recovery in global economic activity might give way to inflationary pressures in advanced economies in the upcoming period. This development might lead to a rise in global policy rates and a deviation in the direction of capital flows. The CBRT, considering external demand, capital flows and increased indebtedness of households and firms, will continue to use macroprudential policy instruments effectively in the forthcoming period as well.
Recent concerns over sustainability of increased public debt especially in some Euro area countries have relatively weakened short-term capital inflows towards emerging economies. Accordingly, the daily auction amount of our foreign exchange buying auctions was reduced from USD 50 million to USD 40 million. Should this trend continue, the CBRT might continue to reduce the daily auction amount for FX purchases gradually. In such a case, the amount of TL liquidity to be provided to the market by this channel will also decrease, which, in turn, will ease the
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TÜRKİYE CUMHURİYET MERKEZ BANKASI potential need for additional increases in required reserve ratios with respect to credit growth in the second half of 2011. In the upcoming period, additional measures that might be taken by other public authorities in coordination with the CBRT will similarly reduce the need for further increases in reserve requirement ratios.
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III. RISKS AND DEVELOPMENTS IN THE BANKING SECTOR
Trend of recovery in the economy, reduced risk perception and intense competition in the banking sector have increased credit supply. Increased confidence regarding the economic outlook, improvement in employment conditions and the low level of credit interest rates have boosted the increase in credit demand. The rise in credit volume and current account deficit, along with acceleration of short term capital inflows has brought into the agenda the risks regarding financial stability. With the new policy mix implemented by the CBRT, it is aimed to bring credit growth to reasonable levels for financial stability and to extend maturities of portfolio investments. The ratio of non performing loans dropped on the back of increased debt service capacity of corporate sector and households, and the sector’s asset quality improved. Although profitability performance of the banking sector trended down due to the decrease in the net interest margin and the capital adequacy ratio declined slightly due to the increase in loans, the banking sector maintains its strong capital and profitability structure.
The Turkish financial sector, mostly composed of banking sector, maintains a sound growth path. The balance sheet of the Turkish financial sector that continued to grow in 2010 as well, increased by 25.8 percent compared to 2009 and reached TL 1,146 billion, whereas its ratio to GDP became 103.7 percent. While the share of banks, which accounts for 87.8 percent of sector assets, remained unchanged compared to the same period of the previous year, the shares of real estate investment trusts, consumer financing firms and factoring companies increased, and those of insurance and financial leasing companies and mutual funds decreased (Chart III.1). The total asset size of the banking sector, which weighs the most in the financial sector, rose by 20.7 percent in nominal terms and by 12.3 percent in real terms, to reach TL 1,007 billion in December 2010 compared to end 2009. Thus, the ratio of the banking sector’s balance sheet size to GDP rose from 87.6 percent at 2009 to 91 percent at end 2010 (Chart III.2)
Chart III.1. Balance Sheet Size of the Financial Chart III.2. Development of the Banking Sector Sector (Points) (Billion TL, %) 1.0 0.74 1,100 100
0.5 1,000 90 0.20 0.12 900 80 0.05 800 0.0 70 0.01 0.01 700 0.13 60 0.18 0.24 600 0.5 50 500 0.53 40 400 1.0 300 30 The Shares As of December 2010 (%): 200 20 1.5 87.8 3.1 2.9 1.4 1.3 1.0 0.5 0.7 1.2 0.1 100 10 0 0 Banks PensionFunds LeasingComp. 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 Factoring Comp. Insurance Insurance Comp. IntermediaryInst. Securities Securities Mut.Funds Consumer Fin.Comp. Total Assets Securities Inves.Funds RealEstate Inves.Funds Total Assets / GDP (Right Hand Axis) Source: BRSA –CBRT, ACMIIT, CMB, AIRCT Source: BRSA –CBRT, TURKSTAT
Although the credit growth rate lost pace in the first quarter of 2011, it did not decline below reasonable levels for financial stability. The ratio of credit growth to GDP surpassed the pre crisis level and became 12.4 percent; however, the ratio of deposit growth to GDP
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has declined since the second half of 2010 (Chart III.3). Despite the strong domestic demand on the back of credit growth and capital inflows, global growth couldn’t gain impetus; as a result, the divergence between domestic and foreign demand became more apparent, and the widened current account deficit created concerns over financial stability (Chart III.4). In order to ease macro financial risks, reduce short term capital inflows and to slow down the credit growth rate, a new policy mix has started to be implemented since November 2010 by using concurrently various policy tools, which are mutually complementary. Factors such as external demand, capital flows and credit expansion might affect the composition of the policy mix in the upcoming period.
Chart III.3. Loans and Deposit Growth / GDP Chart III.4. Capital Inflow and Loans (Excluding NPLs, %) 1, 2 (Excluding NPLs, %) 1 14 14 12 12
10 10
8 8
6 6
4 4
2 2
0 0
2 2 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11
Loans (Exchange Rate Effect Adjusted) / GDP Change in Loans / GDP Deposits (Exchange Rate Effect Adjusted) / GDP Capital Flow / GDP Source: BRSA –CBRT, TURKSTAT Source: BRSA –CBRT, TURKSTAT (1) The basket value used to adjust for exchange rate effect is composed (1) GDP data for the first quarter of 2011 are estimated values. of foreign exchange buying rate of 70 percent of USD and 30 percent of Euro for credits; 60 percent of USD and 40 percent of Euro for deposits. Average basket rate of December 2007 – March 2011 was used to adjust for exchange rate effect and FX indexed credits are included in FX credits. (2) GDP data for the first quarter of 2011 are estimated values. Emerging economies, which also include Turkey, recovered faster than advanced economies. This situation strengthened capital flows to these countries and increased the demand for domestic loans. High growth rates of emerging economies attracted more capital flows to these countries and the credit growth rate recovered on the back of strong domestic demand (Chart III.5). Meanwhile, while risks regarding advanced economies remain important, it is expected that the problems experienced by these countries in management of public debt and their financial systems will persist in the upcoming period and external demand is likely to remain weak. In fact, credit growth rates in the USA, the Euro area and Japan have not yet reached their pre crisis levels (Chart I.12). In this context, the Euro Area Bank Lending Survey suggests that despite strengthening demand for corporate loans, retail loans remain weak (Chart III.6).
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Chart III.6. Credit Standards and Credit Demand Chart III.5. Credit Developments (%) in the Euro Area (%) 1,2 40 Corporate Loans Retail Loans 70 35 70 60 60 30 50 50 40 40 25 30 30 20 20 20 10 10 15 0 0 10 10 10 20 20 5 30 30 40 40 0 50 50 60 60 5 70 70 Israil India Brasil China Egypt Russia 01.03 01.04 01.05 01.06 01.07 01.08 01.09 01.10 04.11 01.03 01.04 01.05 01.06 01.07 01.08 01.09 01.10 04.11 Argentina 2008 2009 2010 Loan Standards Loan Demand South Africa South Saudi Arabia Saudi Source: ECB, Euro Area Bank Lending Survey, April 2011 (1) Negative value in credit standards indicates an easing in standards, Source: IMF, IFS whereas positive value indicates an increase in credit demand. (2) Demand for retail loans is related to housing loans. Credit growth rate is expected to slow down in Turkey, especially in the second half of 2011 on the back of measures taken. The credit growth rate, which had accelerated in the last quarter of 2010, started to lose pace, albeit to a moderate extent, in the first quarter of 2011 owing to the effects of policy decisions (Chart III.7). The share of credits in total assets increased to 53.9 percent and the annual real growth rate reached 30.2 percent in March 2011. Small and Medium Size Enterprises (SME) loans, in addition to other corporate and consumer loans were influential in the credit growth during the exit from the crisis. Indeed, the annual real growth rate of credits standing at 30.2 percent is composed of 8.5 points from consumer loans, 9.8 points from SME loans and 10.5 points from other corporate loans. The contribution of credit cards to growth was limited at 1.4 points in this period (Chart III.8).
Chart III.8. Real Increase in Credits by Type and Chart III.7. Credit Developments Their Contribution to Growth (% Contribution, (Billion TL, %) 1, 2 Excluding NPLs) 1 600 160 35 500 150 30 25 400 140 20
300 130 15
200 120 10 5 100 110 0 0 100 5 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 01.11 02.11 03.11 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 01.11 02.11 03.11
Corporate Loans Consumer Loans Credit Cards Retail Loans SME Other Corporate Real Loan Index (Right Hand Axis) Change in Real Loans Source: BRSA –CBRT (1) Real Credit Index 2007 IV=100. In calculating the index, total credits Source: BRSA –CBRT are expressed in real terms using CPI (2003=100). (1) Expressed in real terms by using CPI (2003=100). (2) Including gross NPLs. In addition to SME loans that continued to recover in the post-crisis period, the increase of consumer loans, including primarily other consumer and housing loans also accelerated in the first quarter of 2011. While total credits displayed an increase by 7.3 percent, consumer credits were up by 8.9 percent and other consumer loans were up by 10.4 percent in the
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first quarter of 2011 compared to end 2010. In the period of 2006 2010, quarterly growth rate of retail loans remained below that of total credits compared to the end of the year, whereas accelerated in 2011 and approached the growth rate of corporate loans. Other consumer and housing loans surged on the back of historically low level of credit interest rates; individuals were able to meet their lagging consumption needs, and they advanced the timing of future demands; banks offered competitive credit products all of which were instrumental in the above mentioned development. Vehicle loans that had been on the decline since 2006 accelerated in the last quarter of 2010 and this increase continued in the first quarter of 2011, albeit to a limited extent and supported the surge in retail loans (Chart III.9).
Chart III.9. Credit Development in the First Quarter (excl. NPLs, %) 1,2 12
10
8
6
4
2
0 Total Loans Corporate SME Other Retail Loans Credit Cards Consumer Housing Vehicle Other 2 Corporate Consumer
4 2006 2010 Average 2010 2011 6 Source: BRSA –CBRT (1) Due to constraints of data availability, the average of other corporate loans and SME loans includes the data pertaining to the period of 2007 2010. (2) Total credits comprise corporate loans and retail loans. Other corporate loans and SME loans constitute total corporate loans. Retail loans are composed of credit cards and consumer loans, whereas housing loans, vehicle loans and other consumer loans account for total consumer loans. In the Turkish credit market, where inter-bank competition is intense, financing needs of firms due to their need of operational capital and stock enhancements, as well as financing needs of individuals due to purchases of durable consumption goods boosted the increase in credit demand. According to the Banks’ Loans Tendency Survey, the credit conditions that had been tightened significantly during the crisis period were eased in the first quarter of 2011 due to intensification of competition among banks, except for housing and general corporate loans (Chart III.10). Despite the positive impact of increased competition in the first quarter of 2011, standards applied to corporate loans were tightened on the back of primarily the constraints on capital adequacy as well as increased risk aversion, funding costs and balance sheet constraints. In the coming quarter, it is expected that increased credit demand by corporate on the back of their financing need arising from stock enhancements and operational capital needs will continue, albeit with less pace, While demand for other consumer loans increased on the back of expenditures of durable consumption goods and improved consumer confidence in the first quarter of 2011, competitive pressure became influential in easing the conditions for such loans. In the same period, conditions for housing loans were subjected to tightening on account of the restriction imposed on the loan to value ratio with regard to housing loans and increased profit margin on average loans.
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Chart III.10. Bank Loans’ Tendency Survey 1,2
80 80 80 80 80 Other Corporates SME Housing Vehicle 60 60 60 60 60 Consumer 40 40 40 40 40 20 20 20 20 20 0 0 0 0 0 20 20 20 20 20 40 40 40 40 40 60 60 60 60 60 80 80 80 80 80 100 100 100 100 100 120 120 120 120 120 II.08 II.09 II.10 II.11 IV.08 IV.09 IV.10 II.08 II.09 II.10 II.11 II.08 II.09 II.10 II.11 IV.08 IV.09 IV.10 IV.08 IV.09 IV.10 II.08 II.09 II.10 II.11 II.08 II.09 II.10 II.11 IV.08 IV.09 IV.10 IV.08 IV.09 IV.10 Loans Standards Loan Demand Source: CBRT (1) Data for the second quarter of 2011 are expectations for the next three months. (2) Negative value for credit standards indicates tightening of standards whereas positive value for credit demand indicates an increase in the credit demand. Effects of the measures taken by the CBRT are expected to reflect on credit interest rates with a lag. Credit interest rates have slightly increased since end 2010 and the tightening effects of the policy mix on credit interest rates are expected become more apparent in the upcoming period. In March 2011, the interest rate for vehicle loans was 10.5 percent in annual terms, whereas interest rates for housing loans, other consumer loans and corporate loans became 9.7 percent, 12 percent and 8.9 percent, respectively (Chart III.11). Banks decreased their deposit rates in the first place due to the cost pressure driven by the increase of required reserves within the scope of the policy mix implemented and they increased their interest rates on loans. As a result, the spread between the interest rates of corporate loans and deposits started to rise again in March 2011 (Chart III.12).
Chart III.11. Interest Rates on Consumer Loans Chart III.12. Interest Rates on Deposits and (%, Flow) Corporate Loans (%, Flow) 1 26 25 6 24 5 20 22 20 4 15 18 3 16 10 2 14 5 12 1 10 0 0 8 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11
12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 Corporate Loans Deposits Other Consumer Vehicle Housing Difference Between Corporate L. and Deposit Rates (RHA) Source: CBRT Source: CBRT While the share of SME loans in the loan portfolio is increasing, that of corporate loans and credit cards are decreasing. Composition of the credit portfolio indicates that the share of consumer loans and SME loans in overall credits are 48.9 percent, showing an increase of 3.9 points compared to end 2009 (Chart III.13). Despite a decline in the share of credit cards in the said period, the increase in the share of other consumer loans is noteworthy. This development is considered to be mainly attributable to the fact that individuals started to meet their cash needs by
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using other consumer loans instead of credit card cash advance, which incurs a higher interest rate (Chart II.33).
In addition to the measures taken by the CBRT regarding credit growth, the BRSA introduced restrictions on the loan to value ratio with regard to housing loans in order to hedge against increased credit risks of the banking sector and to reduce risks related to financial stability. The BRSA decision, published in the Official Gazette No. 27789 dated December 18, 2010, stipulates that in credits to be extended by banks to customers for housing and in consumer credits to be extended under housing collaterals, the amount of the credit will be limited to 75 percent of the value of the real estate subject to collateral and in corporate loans to be extended for commercial real estate purchase, the amount of the credit would be limited to 50 percent of the value of the real estate subject to collateral as of January 1, 2011.
Chart III.13. Distribution of Total Loans Chart III.14. Distribution of Consumer Loans (%, Billion TL, excluding NPLs) (%, Billion TL, Excluding NPLs) 100 600 100 160 90 90 80 40.0 500 45.1 45.7 43.3 43.1 80 43.1 140 46.6 47.2 48.5 49.2 70 70 60 400 60 120 50 26.8 50 9.1 6.6 4.7 23.0 21.2 23.9 24.0 4.4 4.3 40 300 40 100 30 9.5 9.3 9.3 8.3 7.9 30 20 200 47.8 46.8 48.1 47.1 46.6 20 80 10 23.8 22.6 23.8 24.5 24.9 10 0 100 0 60 12.07 12.08 12.09 12.10 03.11
Other Corporate SME 12.07 12.08 12.09 12.10 03.11 Housing Vehicle Credit Cards Consumer Loans Other Consumer Consumer Loans (RHA) Total Loans (Right Hand Axis) Source: BRSA –CBRT Source: BRSA –CBRT Maturity of credits that are mostly extended in TL becomes longer. Extension of maturities of credits in addition to the extension of maturity of deposits is considered a favorable development for the corporate sector and households. The share of medium and long term credits increased by 4.9 points in March 2011 compared to end 2009 and became 63.9 percent (Chart III.15). The increase in the share of medium and long term FX denominated loans and the decline in the share of short term TL denominated loans were instrumental in this development. As of March 2011, the share of FX denominated loans in total loans increased by 0.6 points compared to end 2010 and reached 32.5 percent on the back of depreciation of TL (Chart III.15). Compared to other countries, the share of FX denominated loans in the Turkish banking system is close to the EU average (Chart III.16). Extension of the maturity of loans and increased share of TL denominated loans are favorable developments in terms of financial stability.
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Chart III.15. Currency and Maturity Composition Chart III.16. FX Loans of Loans (%) 1,2 (% Total Loans) 1 100 100 90 80 45.9 42.8 41.0 38.0 36.1 80 60 70 40 54.1 57.2 59.0 62.0 63.9 60 20 50 0 40 2007 2008 2009 2010 03.2011 30 Short Term Medium and Long Term 20 100 10 80 64.9 0 60 69.7 68.1 68.1 67.5 Italy Malta 40 Spain Latvia Poland France Turkey Austria Greece Ukraine Bulgaria Portugal Romania Germany Denmark 20 30.3 35.1 31.9 31.9 32.5 Lithuania Switzerland South Africa South 0 Luxembourg Czech Republic Czech Slovak Republic Slovak
2007 2008 2009 2010 03.2011 Kingdom United Domestic Currency Loans FX Loans (Including FX Indexed Loans) Federation Russian Source: BRSA –CBRT Source: IMF, BRSA –CBRT (1) Short term means term less than 1 year. (1) Up to date data, pertaining to end 2010 in general, included in the FSI (2) FX indexed loans are included in FX loans. database are used. Parallel to the credit growth, the loan to deposits ratio increased whereas the share of banks’ short-term sources of finance in total assets increased and that of securities decreased. As of March 2011, the share of loans in the total assets increased by 1.7 points compared to end 2010 figures and reached 53.9 percent; the share of securities, the weight of which had increased during the crisis was down by 2 points to 26.6 percent (Chart III.17). On the liabilities side, the share of deposits, which are the main source of finance for banks, declined to 60.1 percent. In addition to deposits, the main source of finance, the banks financed their needs increasingly through funds provided from increasing repo transactions, external borrowings, issuance of securities and the decline in the securities portfolio (Chart III.18). As the acceleration in credit volume was above the increase of deposits, the loan to deposits ratio increased to 92.7 percent in this period (Chart III.19).
Chart III.17. Loans and Securities Chart III.18. Fu nds Obtained from Deposits, (% Asset) 1 Repo Transactions and Due to Banks (% Asset) 55 33 14 63 13 54 32 62 12 53 31 11 61 52 30 10 60 51 29 9 50 28 8 59 49 27 7 58 48 26 6 57 5 47 25 4 56 46 24 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11
12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 Due to Banks Repo Loans Securities (Right Hand Axis) Deposits (Right Hand Axis) Source: BRSA –CBRT Source: BRSA –CBRT (1) NPL is excluded. The foreign liabilities of banks are still on the increase. Parallel to the fading effects of the crisis, recovery in the external borrowing market has been underway since end- 2009. As of March 2011, total foreign liabilities of the banking sector rose by 8.6 percent to USD 89 billion compared to end 2010 and 13.2 percent of total assets were funded by foreign liabilities (Chart III.19 and Chart III.20).
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Chart III.19. Loan / Deposit and Foreign Chart III.20. Deposit and Foreign Liabilities Liabilities (%, Billion USD) 1 (% Liabilities)
95 70 14 90 68 66 85 13 64 80 62 75 60 12 70 58 65 56 11 60 54 55 52 50 10 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11
Loans / Deposits (%) 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 Deposits Foreign Liabilities (Right Hand Axis) Foreign Liabilities (Billon USD) Source: BRSA –CBRT Source: BRSA –CBRT (1) Excluding NPL
The increase in foreign liabilities of banks has contributed to the maturity extension of liabilities. At end 2010, the total amount of syndication and securitization credits of banks went up by 29.5 percent to USD 23.4 billion on an annual basis and became USD 24.1 billion in March 2011 (Chart III.21). The share of syndication and securitization credits within foreign liabilities; total funding sources and total liabilities is 27.1 percent; 4.1 percent and 3.6 percent, respectively. The weighted average maturity of foreign liabilities became 3.9 years in March 2011 due to the rise in the share of syndication credits. In the same period, the average maturity of syndication credits that represent 17.2 percent of foreign liabilities was 1 year; while that of securitization credits comprising 9.9 percent of foreign liabilities was 6.5 years (Chart III.22). In addition to this, deposit banks, which were allowed to issue foreign bills and bonds only, were permitted to issue domestic bills and bonds in TL by the BRSA. Since the granting of this permission, deposit banks have issued domestic bonds totaling around TL 6.8 billion in nominal terms; and foreign bonds of about TL 5.1 billion in terms of USD 5. Moreover, banks operating with on balance sheet short position have been converting their FX resources into TL by swap operations and generating resources for loans. The net TL borrowing swap volume of banks became TL 25 billion in March 2011.
Chart III.21. Composition of Foreign Liabilities Chart III.22. Distribution of Foreign liabilities (Billion USD) and Average Maturities (%, Year)
90 100 9 80 90 8 80 7 70 70 6 60 60 5 50 50 4 40 40 30 3 30 20 2 10 1 20 0 0 10 0 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 Syndication (Share) Securitization (Share) Other (Share) 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 Syndication (Maturity) (Right Hand Axis) Syndication+Securitization Other Credits Repo Deposits Other Securitization (Maturity) (Right Hand Axis) Foreign Liabilities (Maturity) (Right Hand Axis) Source: BRSA –CBRT Source: BRSA –CBRT
5 Please refer to: Special Topic V.7. Bond and Bill Issues of the Banking Sector. ______Financial Stability Report – May 2011 32
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During the crisis, the interaction between market and funding liquidity became more pronounced. The market liquidity index confirms that confidence in the markets continues to exist. The funding liquidity ratio has started to have a decreasing trend as of the last quarter of 2010 (Chart III. 23). This decline was attributable to the decline in securities and the increase in non core funding resources, and in this scope especially the increasing trend in payables to foreign banks, which are currently at low levels (Chart III.24). The rise in capital flows towards developing countries and the external funding opportunities of banks under eligible conditions are significant factors in this development. Despite the rise in non core resources, the sensitivity of the banking sector against the wholesale funding is limited as deposits are significant resources in funding and constitute around 60 percent of total liabilities. Nevertheless, non core funding resources of banks equal about 19 percent of the total balance sheet size. Adding the issues of securities to this, the share totals 20 percent.
Chart III.23 Fund Liquidity (%) and Market Cha rt III.24 Non -core Funding Resources Liquidity Index 1,2 (Billion TL) 300 2 210 1 250 180 0 150 200 1 120
150 2 90 3 100 60 4 30 50 5 0 0 6 03.06 06.06 09.06 12.06 03.07 06.07 09.07 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11
03.06 06.06 09.06 12.06 03.07 06.07 09.07 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 Funds From Repo Transactions FX Funds from Repo Transactions TL Funding Liquidity (%) Market Liquidity (right axis) Payables to Banks FX Payables to Banks TL Source: BRSA-CBRT, ISE Source:BRSA-CBRT (1) Funding liquidity ratio= (cash and cash equivalent assets + securities)/non core funding resources. (2) Non core funding resources= demand deposits at banks + funds from repo + payables from banks. In line with the recovery in the Turkish economy, the credit supply increased and the tendency to remain liquid went down. Besides, liquidity ratios have trended downwards since the start of 2010. Banks met their liquidity requirements, which rose due to their required reserve liabilities by borrowing from the Central Bank via repo auctions; and cut down on their government securities portfolios to support credit growth as of the second quarter of 2010.
By March 2011, the ratio of liquid assets to total assets went down by 2.1 points to 26.8 percent compared to the figures of 2010. The decline in free government securities as opposed to the increase in cash and cash equivalent assets was influential in this (Chart III.25).
While the ratio of liquid assets to total assets decreased, the total liquidity adequacy ratios of the banking sector, computed in accordance with the Regulation on the Measurement and Assessment of Liquidity Adequacy of Banks still remain above 100 percent, which is the legal ratio . (Chart III.26).
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Chart III.25. Liquid Assets (%Asset) 1,2 Chart III.26. Total Liquidity Adequacy Ratio
35 250 30 200 25
20 150 15
10 100 5 50 0 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11
Cash and Cash Equivalent Assets 1 st Maturity Bracket (%) Free Securities 2 st Maturity Bracket (%) Liquid Assets Legal Limit (%) Source: BRSA-CBRT (1) Cash and cash equivalent assets=Cash+ CBRT + Money Markets + Banks + Reverse Repo Source: BRSA-CBRT (2) Free Securities = Government securities that are not used as collateral or for repo Transactions Stress testing results indicate that banks’ liquidity ratios remain above legal limits after the given shocks. For the banks’ asset side, haircuts and the liability side the run-off rates are simulated. Results of the liquidity stress tests assert that under severe but feasible shocks banks’ liquidity ratios for the 2 nd maturity bracket remains above the legal ratio. While total liquidity ratio in the said maturity bracket was 130 percent in March 2011, the fact that 95 percent of the simulated ratios remained above the legal limit highlights banks’ sound liquidity conditions (Chart III.27).
Table III.1 Assumptions Chart III.27 Results of the Stress Test Frequency Haircuts % 100 100 90 90 Securities 20 80 80 70 70
Consumer Loans 15 60 Ratio Legal 60 50 50 40 40 Runoff Rates % 30 30 20 20 Deposits 25 10 10 0 0 Noncore funding 100 Ratio 98 96 94
127 124 122 120 117 115 113 110 108 105 103 101 (%)
Source: CBRT Source: CBRT The foreign exchange liquidity ratio is above the legal ratio, the foreign exchange position is balanced and the share of foreign exchange assets and liabilities on the balance sheet is on the increase. The foreign currency liquidity adequacy ratio, having dropped in 2010 in parallel to global developments, followed a horizontal course in the first quarter of 2011, remaining above 80 percent, which is the minimum legal ratio (Chart III.28). It is noteworthy that the weight of FX assets and FX liabilities on the balance sheet is on an increasing trend. As of March 2011, including those indexed to foreign exchange, the ratio of FX assets to total assets is 29 percent, the ratio of FX liabilities to total liabilities is 31.6 percent. The on balance sheet short position, which
______Financial Stability Report – May 2011 34
TÜRKİYE CUMHURİYET MERKEZ BANKASI is closed with off balance sheet transactions consisting mostly of swap transactions increased from USD 13.8 billion at end 2010 to USD 18.2 billion in March 2011. As of March 2011, while the ratio of on balance sheet short position to own funds was 19.9 percent, the ratio of the foreign currency net general position computed by taking off balance sheet transactions into consideration to own funds realized as 1.1 percent (Chart III.29).
Chart III.28. Foreign Currency Liquidity Chart III.29. Foreign Currency Position (%) Adequacy Ratio 250 5 37 0 35 200 5 33
10 31 150 15 29
100 20 27 25 25 50 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11
12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 On balance sheet position/Equity Capital 1 st Maturity Bracket (%) FXNGP/Equity Capital 2 st Maturity Bracket (%) FX Assets/Total Assets (Right Hand Axis) Legal Limit (%) FX Liabilities/Total Liabilities (Right Hand Axis) Source: BRSA-CBRT Source: BRSA-CBRT
Box III.1. Liquidity Measures taken by the Central Bank of Turkey
The current economic climate necessitating the monetary policy to consider financial stability along with price stability, required the utilization of a broader set of monetary policy instruments, hence a policy mix consisting of instruments such as policy rates, reserve requirement ratios and liquidity management facilities has started to be applied. In this context, the lower policy rate, wider interest corridor and higher reserve requirement ratios has been assessed to be the expedient policy mix for financial stability and price stability. The Monetary Policy Committee, at its meeting held on December 16, 2010 decided to reduce the interest rate for one week repo transactions, which has been determined as the policy rate, to 6.5 percent, and the overnight borrowing rate to 1.5 percent. The Committee at its meeting held on January 20, 2011 decided to reduce the interest rate for one week repo transactions to 6.25 percent. On the other hand, the synchronous rise in the current account deficit and credits and the rise in the share of short term sources in financing the said deficit rose concerns about financial stability, henceforth the policy interest rate was decreased and the interest corridor widened to decrease short term capital inflows, while the required reserve ratios were increased in order to slowdown credit expansion. Moreover, the TL required reserve ratio was differentiated according to the maturity of deposits/participation accounts starting from 07.01.2011 liability period in order to lengthen the maturity of banking sector resources, reduce maturity mismatch and contribute to financial stability. Then, starting from 04.02.2011 and 01.04.2011 liability periods, TL required reserve ratios were increased for sight deposits, deposits/participation accounts up to 1 month and up to 3 month maturity and other liabilities in order to strengthen financial stability. Also the FX required reserve ratio was differentiated according to the maturity of liabilities and FX and TL required reserve ratios were increased for liabilities with shorter maturities. Therefore, liquidity amounting to approximately 38 billion TL and 1.6 billion USD has been withdrawn from the market.
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Table 1. Development of Required Reserve Ratios TL ESTIMATED DATE OF DATE OF CHANGE RATIO LIQUIDITY ENFORCEMENT MAINTENANCE (% POINT) (%) WITHDRAWAL (Billion TL) 02.10.2009 16.10.2009 1 5 3.3 01.10.2010 15.10.2010 0.5 5.5 '2.1 * 12.11.2010 26.11.2010 0.5 6 2.1 07.01.2011 21.01.2011 ** 1.4 7.4 7.6 04.02.2011 18.02.2011 2 9.4 9.8 01.04.2011 15.04.2011 3.8 13.2 19.1 29.04.2011 13.05.2011 0.1 13.3 1.5
FX ESTIMATED DATE OF DATE OF CHANGE RATIO LIQUIDITY ENFORCEMENT MAINTENANCE (% POINT) (%) WITHDRAWAL (Billion TL) 28.11.2008 12.12.2008 2 9 2.5 30.04.2010 14.05.2010 0.5 9.5 0.7 06.08.2010 20.08.2010 0.5 10 0.7 01.10.2010 15.10.2010 1 11 1.5 07.01.2011 21.01.2011 *** 11 0.2 29.04.2011 13.05.2011 ** 0.8 11.8 1.4
Source: CBRT
* Remuneration on TL required reserves has been terminated with an effect of 1.1 billion TL annually.
** From this date ratio is calculated as a weighted average of required reserve ratios of corresponding maturity groups. *** Effect of expanding reserve requirement base to include repo transactions.
On account of the credit expansion and the increase in debt service capacity, asset quality improved and the NPL ratio went down. Besides the increase in credits, collection of NPLs, their deletion from assets and their elimination from the portfolio due to sales, the ratio of NPL’s to total credits dropped to 3.2 percent by March 2011. Considering the collaterals received for loans besides the provisions set aside for NPLs, the credit risk indicators of the sector appear strong (Chart III.30 and Table III.2).
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Chart III.30 Non-Performing Loans (NPLs) (%) Table III.2 NPL Ratio (%)
6,0 115 2009 2010 03.11 5,5 110 Total Loans 5.3 3.7 3.2 5,0 105 Corporate 4.9 3.4 3.0 4,5 100 -SME Loans 7.6 4.5 3.8 4,0 95 -Other 3.6 2.8 2.6 3,5 90 Corporate Loans 3,0 85 Retail Loans 6.0 4.1 3.7 2,5 80 -Consumer 4.1 2.7 2.3 2,0 75 Loans --Housing 2.1 1.4 1.2 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 --Vehicle 10.3 6.0 4.9 NPL Ratios -- Oth er Provisions / NPL (Right Hand Axis) 5.5 3.7 3.1 (Provisions + Guarantess) / NPL (Right Hand Axis) Consumer -Credit Cards 10.4 8.0 7.7
Source: BRSA–CBRT Source: BRSA–CBRT
Compared to other countries, the Turkish banking sector performs better with regard to NPLs. The relatively slow recovery in economic activity in advanced economies and the troubles experienced in the financial systems of some EU countries led the ratio of NPLs to remain high in these countries (Chart III.31).
Chart III.31 Ratio of NPLs and Net NPL / Own Funds of Selected Countries (%) 1 18 120 16 14 100 12 80 10 8 60 6 40 4 2 20 0 0 Italy Brazil Malta Spain China Japan Latvia France Poland Turkey Greece Italy Austria Estonia Malta Belgium Spain Bulgaria China Portugal Japan Hungary Latvia Romania Germany Denmark Lithuania France Poland Turkey Austria Greece Estonia Belgium Bulgaria Portugal Czech Rep. Czech Hungary Romania Switzerland Germany Denmark Lithuania South Africa South Luxembourg Russian Fed. Russian United States United South Africa South Luxembourg Russian Fed. Russian Slovak Republic Slovak United Kingdom United United States United
Republic Czech Slovak Republic Slovak United Kingdom United Source: IMF, BRSA–CBRT (1) The latest data are used most of which pertain to end 2010. Although profitability performance of the banking sector has exhibited a downward trend since the second half of 2010, it is considered that the profitability of the sector will not be as low as foreseen by the market for the rest of the year as a result of price adjustments. As of end 2010, the net profit of the banking sector went up by 9.6 percent compared to the end of last year and amounted to TL 22.1 billion. As of March 2011, according to the annualized data, the net profit decreased by 3.8 percent compared to year end figures of 2010 and fell to TL 21.3 billion. This was attributable to the decrease in net interest income despite the decline in loan loss provision expenses. Although the return on equity went down by 1.3 points to 16.7 percent by March 2011 compared to end 2010 figures, the return received remained above the alternative risk free rate of return (Chart III.32). In the same period, due to the contraction in net interest margin, parallel to the return on equity, the return on assets went down as well. As of March 2011, return on assets dropped by 0.2 points compared to the end of last year and was realized as 2.2 percent; while the net
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interest margin, with a contraction of 0.4 point went down to 3.9 (Chart III.33). Meanwhile, it is expected that the contraction in the net interest margin will not linger on at the same speed; the pace of decline in the profitability in the first quarter of the year will decelerate in the rest of the year and the profitability will follow a more constant course.
Chart III.32 Return on Equity and Risk-Free Chart III.33 Return on Assets and Net Interest Interest Rate (%) Margin (%) 1 25 3.0 6.0
20 2.7 5.5
15 2.4 5.0
10 2.1 4.5
5 1.8 4.0
0 1.5 3.5 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 Return on Equity Return on Assets Interest Rate of Government Bond Net Interest Margin (Right Hand Axis) Source: BRSA-CBRT Source: BRSA-CBRT (1) Net Interest Margin = Net Interest Income / Average Assets Despite the downward trend of profitability indicators of the banking sector, they are still above those of other countries. The return on equity and return on assets of the Turkish banking sector are remarkably higher than those of EU member countries (Chart III.34).
Chart III.34. Return on Equity and Return on Assets of Selected Countries (Annual, %) 1
30 4 Return on Equitiy Return on Assets 20 3 10 2 0 10 1 20 0 30 1 40 2 50 60 3 Italy Italy Malta Spain Malta Spain Latvia Latvia France Poland France Turkey Poland Austria Greece Turkey Ireland Austria Greece Ireland Finland Estonia Estonia Finland Bulgary Bulgary Belgium Belgium Slovakia Portugal Slovakia Slovenia Slovenia Portugal Hungary Hungary Romania Romania Germany Denmark Sweeden Lithuania Germany Denmark Sweeden Lithuania Czech Rep. Czech Czech Rep. Czech Netherlands Netherlands Luxembourg Luxembourg United Kingdom United United Kingdom United Source: ECB-EU Banking Sector Stability Report, IMF, BRSA-CBRT (1) The latest data on the FSI data base are used most of which pertain to end 2010. The ongoing rise in risk-weighted assets in line with the continuing increase in loans and recalculation of the exposure stemming from operational risk in the New Year led to a decrease in the capital adequacy ratio. The capital adequacy ratio, which went down by 1 point to 18 percent in March 2011 compared to end 2010, had greatly surpassed the legal and target ratios (Chart III.35). The share of Tier I capital within own funds maintains its approximate level of 90 percent, which indicates that own funds consist of elements with high quality. As a matter of fact, by March 2011, the Tier 1 capital ratio realized at 16.4 percent, which was only 1.6 points below the total capital adequacy ratio. In the same period, the ratio of own funds to total assets fell by 0.5 point to
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12.9 percent compared to previous year end figures (Chart III.36). This development was driven by the rise in assets, which went beyond that of own funds.
Chart III.36 Ratio of Own Funds to Total Assets Chart III.35 Capital Adequacy Ratio (%) (%)
22 14.0
20 13.5 18 13.0 16 12.5 14 12 12.0 10 11.5
8 11.0 6 10.5 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 Capital Adequacy Ratio Tier I Ratio
Source: BRSA-CBRT Source: BRSA-CBRT
The banking sector operates with a high capital adequacy ratio and low leverage ratios. When compared with other countries, the banking sector has higher capital and a low debt ratio. The Turkish banking sector is among those with the highest ratios with regard to both capital adequacy ratio and the ratio of own funds to total assets (Chart III.37 and Chart III.38).
Chart III.37 Capital Adequacy Ratios of for Chart III.38 Ratio of Own Funds to Total Assets Selected Countries (%) 1 for Selected Countries (%) 1
25 16 14 20 12 15 10 8 10 6 5 4 2 0 0 Italy Spain Malta Latvia Italy Poland France Turkey Greece Ireland Finland Malta Austria Estonia Spain Bulgary Latvia Belgium Slovakia Portugal Slovenia Hungary Turkey France Poland Poland Romania Greece Austria Estonia Sweeden Ireland Finland Germany Denmark Lithuania Sweden Belgium Bulgaria Slovakia Slovenia Hungary Romania Germany Denmark Lithuania Czech Rep. Czech Netherlands Luxembourg Czech Rep. Czech Netherlands Luxembourg United Kingdom United UnitedKingdom Source: ECB-EU Banking Sector Stability Report, IMF, BRSA- Source: ECB-EU Banking Sector Stability Report, IMF, BRSA- CBRT CBRT (1) The latest data on the FSI data base are used most of which pertain (1) The latest data on the FSI data base are used most of which pertain to end 2010. to end 2010. The share of total risk exposure of the banking sector within total assets has an increasing trend parallel to the developments in loans. By March 2011, the said ratio went up by 2.5 points to 74.5 percent compared to the previous year end figures (Chart III.39). Meanwhile, the ratio of free capital, calculated by deducting capital requirement from the regulatory capital, to total assets, dropped by 0.5 point to 7.4 percent in the same period (Chart III.40).
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Chart III.39. Composition of Total Risk Exposure Chart III.40. Developments in Free Capital
(Billion TL, %) (Billion TL, %) 800 76 150 10 700 74 120 9 600
500 72 90 8 400 300 70 60 7 200 68 30 6 100 0 66 0 5 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 Credit Risk Market Risk Free Capital Regulatory Capital Operational Risk Risk Exposure / Total Assets Free Capital/Total Assets (R. H. Axis) Source: BRSA-CBRT Source: BRSA-CBRT
Scenario analysis, which tests the resilience of the banking sector to shocks originating from credit and market movements, shows that the sector has the capacity to absorb shocks 6. According to the scenario analysis, when maximum shocks are applied to the exchange rate, Eurobond returns, interest rates and NPLs simultaneously, the capital adequacy ratio of the sector decreases by 9.1 points; but still remains close to the 8 percent legal ratio (Table III.3 and Chart III.41).
Table III.3 Scenarios Applied 1 Chart III.41 Results of Scenario Analysis
Exchange Interest Eurobond NPL 16 Rate Rate Scenario (% loss of (point (point 14 (% increase) value) increase) 2 increase) 12 1 30.0 5.0 10.0 3.0 10 2 31.5 5.3 10.5 4.0 8 3 33.0 5.5 11.0 5.0 4 34.5 5.8 11.5 6.0 6 5 36.0 6.0 12.0 7.0 4
6 37.5 6.3 12.5 8.0 2 7 39.0 6.5 13.0 9.0 0 8 40.5 6.8 13.5 11.0 1 2 3 4 5 6 7 8
Source: CBRT (1) In scenario analysis, taking into consideration the past crises, shocks are applied to the risk factors simultaneously. Source: CBRT (2) It is the Turkish Lira interest rate shock. The shock of foreign currency interest rate is about 1/3 of the one applied to Turkish Lira interest rate shock. Indicators regarding the banking sector highlight the financial strength of the system. The improvement in lending conditions, the low level of interest rates and the increasing repayment capacity of borrowers led to a decline in the ratio of bad loans. While the foreign liabilities of the banking sector kept increasing, the share of public securities on the balance sheet decreased. Despite the improvement in credit quality, the rise in interests and non interest incomes lagged far behind that in expenses. This led profitability performance indicators to trend downwards while maintaining their sound structure. Meanwhile, the capital adequacy ratio maintains its high level above
6 Please refer to: Special Topic V.2. Stress Test Approach. ______Financial Stability Report – May 2011 40
TÜRKİYE CUMHURİYET MERKEZ BANKASI the minimum and target ratios although experiencing a limited decrease due to the rise in loans. Despite the trend of decrease in liquidity ratios due to the decline in securities coupled with the rise in repo and borrowings from foreign banks, these ratios are still above the legal requirements. On the back of these developments, the financial strength index reached the average of the January 2004 March 2011 period (Chart III.42 and Chart III.43).
Chart III.42. Financial Strength Index 1,2 Chart III.43. Banking Sector Stability Map 1 Index 124 1999=100 Capital Adequacy 1.0
121 0.8
0.5 Asset Profitability 118 0.3 Quality
0.0 115
112 Sensitivity to FX and Liquidity Interest Rate 12.06 12.07 12.08 12.09 12.10 03.11 12 08 09 10 03 11 FSI Average 1 Average 2
Source: BRSA-CBRT (1) The “average1” is the average of December 1999 – March 2011 Source: BRSA-CBRT and the “average 2” is the average of January 2004- March 2011 (1) Computed as a sub field of Financial Stability Map 2) Since there are differences on the operating principles participation banks are excluded. In the forthcoming period, the rate of increase in credits is expected to decelerate owing to the lagged effect of the measures taken in line with the policy mix . Under current conditions, where the decoupling between domestic and foreign demand became more pronounced and particularly consumer loans accelerated, the increasing current account deficit escalated risks pertaining to financial stability. In this scope, foreign demand, the course of capital inflows and credit developments will be significant in setting up the content of the policy mix. Meanwhile, besides those taken by CBRT, measures that should be taken by other institutions to ensure financial stability are essential. The robust activity in the credit market and the increasingly competitive environment of banks should preserve their active risk management in lending procedures.
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IV. FINANCIAL INFRASTRUCTURE
Financial market infrastructures (FMI) play a critical role in the financial system and the economy in general. Financial market infrastructures, which ensure transaction, clearing and settlement are realized in the markets; improvement and strengthening of the markets also play a significant role in the maintenance of financial stability. In the current environment of intense interaction in international markets, improper functioning of financial market infrastructures causes spillover effects across markets and leads to significant risks in the global financial system. This effect may be more evident during periods of fluctuations in the markets. The recent financial crisis revealed the importance of efficient financial market infrastructures.
In recent years, maintenance of financial stability has become one of the leading objectives for central banks. Following the financial crisis that had impacts on all markets, the Committee for Payment and Settlement Systems (CPSS) operating under the aegis of the Bank for International Settlements (BIS), which our country became a member of in 2009, embarked on studies to render financial market infrastructures with systemic importance more resilient against shocks and have access to the resources of central banks.
Moreover, as a result of studies carried out jointly by the CPSS and the International Organization of Securities Commissions (IOSCO) previously-set principles determined for financial market infrastructures were reviewed and new principles were set and announced to the public. The report encompassing the said principles is planned to be published before 2012 by the CPSS and the IOSCO. The aim of establishing advice in the form of regulatory rules for financial market infrastructures is to develop standards to encompass the experiences obtained in the recent crisis and monitor these infrastructures regarding their adherence to risk management standards through effective supervision and oversight. In this context, in the forthcoming period, central banks are expected to attach more importance to the improvement, regulation and oversight of financial market infrastructures.
This section presents recent developments in the basic systems establishing financial market infrastructures in our country. These systems comprise the electronic fund transfer system (TIC RTGS), through which real time settlement of interbank Turkish Lira transactions are realized; the Electronic Securities Transfer and Settlement System (TIC ESTS), which facilitates the dematerialized and real time transfer and settlement of securities in electronic form; the cheque clearing system that ensures the interbank settlement of cheques and the Takasbank (ISE Settlement and Custody Bank), where the card based payment system is realized.
The CBRT is the sole owner and operator of the TIC RTGS system. TIC RTGS, operating under the principle of Real Time Gross Settlement RTGS, is a systemically important electronic payment system realizing payments among banks in Turkish Lira and TIC ESTS. It works in an integrated manner with the TIC RTGS and provides the opportunity for participants to realize their transfer and settlement of securities with regard to the Delivery versus Payment (DvP) principle. The number of participants in the TIC RTGS and TIC ESTS systems became 48 by April 2011.
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The transaction value of the TIC RTGS system increased by 5.2 percent to TL 24,938 billion in 2010 compared to the previous year. The number of transactions performed in 2010 in the TIC RTGS system climbed by 9.9 percent to 142 million (Chart IV.1).
The value of DvP transactions through TIC ESTS in 2010 decreased by 3.8 percent to TL 1,646 billion, while the number of transactions increased by 9.6 percent to 27.7 thousand (Chart IV.2). The said period witnessed an increase in the number and a decline in the value of DvP transactions unlike the previous year.
Chart IV.1. Number and Amount of the Annual Chart IV.2. Number and Amount of the Annual Transactions in the TIC-RTGS System (Billion TL, DvP Transactions in the TIC-ESTS System Million) (Billion TL, Number)¹
24,500 160 1,960 35,000 140 21,000 1,680 30,000 120 17,500 1,400 25,000 100 14,000 1,120 20,000 80 10,500 840 15,000 60 7,000 560 10,000 40 280 5,000 3,500 20
0 0 0 0 06 07 08 09 10 06 07 08 09 10
V alue V olume (right hand axis) V alue V olume (right hand axis)
Source: CBRT Source: CBRT (1) DvP: Delivery versus Payment Predictability of the distribution of payments within the day contributes to the efficiency of liquidity management and decreases liquidity risk. In the fourth quarter of 2010, 31 percent, 69 percent and 95 percent of intra day payments realized within the TIC RTGS system were completed by 10:00, 16:00 and 17:00, respectively. While the total of transactions in the system became TL 6,260 billion in the last quarter of 2010, the said amount reached TL 8,088 billion in the first quarter of 2011 (Chart IV.3). In the first quarter of 2011, 37 percent, 26 percent and 27 percent of the payments within the TIC RTGS system were made between 08:00 10:00, 14:00 16:00 and 16:00 17:30, respectively. Chart IV.3. Concentration of Payments by Hours and Value of Transactions in the TIC-RTGS System (%, Billion TL)
100 10,000
9,000 88 until 10:00 8,000 75 until 12:00 7,000
63 6,000 until 14:00
50 5,000 until 16:00 4,000 38 until 17:00 3,000 25 2,000 V alue (right hand axis) 13 1,000
0 0 I 2010 II 2010 III 2010 IV 2010 I 2011
Source: CBRT
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Since there are no upper and lower limits for the value of transactions in the TIC- RTGS system, the number of annual transactions is higher than that of many European countries. As of 2010, the ratio of transactions in small amounts (below TL 3,000) to the total number of transactions via TIC RTGS was 76 percent.
A comparison of countries as of 2010 indicates that the ratio of the value of TIC- RTGS transactions to GDP is lower than the same ratio in other countries examined. The value of TIC RTGS transactions on an annual basis, which was 22.7 times the GDP in 2008, reached 24.7 times the GDP in 2009, and realized as 22.5 times of the GDP in 2010 (Table IV.1)
Table IV.1. Real Time Gross Settlement System (RTGS) Country Comparison
2005 2006 2007 2008 2009 Belgium (TARGET2 BE) Transaction Volume (million) 1.8 1.7 2.0 2.8 2.0 Transaction Value (billion USD) 21,448 24,373 36,453 39,683 28,980 Transaction Value/GDP 57.0 61.1 79.5 78.6 61.4 France (TARGET 2 BDF) Transaction Volume (million) 4.3 4.6 4.9 6.7 7.6 Transaction Value (billion USD) 151,425 169,587 198,527 149,131 130,406 Transaction Value/GDP 70.6 74.8 76.6 52.3 49.1 Holland (TARGET2 NL) Transaction Volume (million) 4.7 4.8 7.3 9.3 9.4 Transaction Value (billion USD) 38,126 40,146 53,434 86,153 88,834 Transaction Value/GDP 59.8 59.2 68.3 98.8 111.7 Germany (TARGET2 BBk) Transaction Volume (million) 35.8 37.9 47.5 41.6 44.7 Transaction Value (billion USD) 172,023 189,140 317,934 323,884 238,260 Transaction Value/GDP 61.8 64.8 95.5 89.2 71.5 Switzerland (SIC) Transaction Volume (million) 256 317 357 372 382 Transaction Value (billion USD) 32,845 35,867 43,570 53,595 52,355 Transaction Value/GDP 88.5 91.4 100.3 107.1 106.0 TARGET Transaction Volume (million) 76.3 83.4 99.1 89.0 87.6 Transaction Value (billion USD) 613,695 676,806 923,700 894,126 738,488 CLS Transaction Volume (million) 47.9 61.5 90.3 134.4 150.1 Transaction Value (billion USD) 545,838 714,320 940,621 1,039,230 890,470 Turkey (EFT) Transaction Volume (million) 76.7 93.1 106.1 119.3 129.5 Transaction Value (billion USD) 5,806 10,528 13,886 16,827 15,251 Transaction Value/GDP 12.1 20.0 21.4 22.7 24.7
Source: BIS, CBRT
In 2010, the share of the top five banks in terms of the number of transactions through TIC RTGS, decreased year on year from 60.6 percent to 59.7 percent, whereas that of the top ten banks increased year on year from 80.1 percent to 80.8 percent (Chart IV.4).
The TIC-RTGS system continues to demonstrate high availability . The availability ratio, which indicates the continuity of the payment system and is the ratio of the time span that participants can access the system to total working hours, was 99.98 percent on average in 2010 (Chart IV.5).
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Chart IV.4. Concentration Ratio in the TIC -RTGS Chart IV.5. Accessi bility Ratio within the TIC - System (%)¹ RTGS-ESTS System (%)
100 100.00 78.6 80.5 80.6 80.1 80.8 80 99.75 60.6 56.9 58.6 60.3 59.7 60
99.50 40
99.25 20
0 99.00 I I I I II II II IV IV IV III III 2006 2007 2008 2009 2010 III 08 09 10 11 TIC RTGS 5 Banks TIC RTGS 10 Banks
Source: CBRT Source: CBRT (1) CBRT transactions are excluded. The analysis of the number and value of transactions within the TIC RTGS system in daily averages indicate that in 2010, the average number and value of transactions on a daily basis was 569 thousand and TL 99.8 billion, respectively (Table IV.2).
Table IV.2. Number and Value of Transactions and Daily Averages within the TIC -RTGS System Number of Value Daily Average Daily Average Operational Day Number (million TL) Number Value (million TL) 01.10 20 10,095,978 2,127,511 504,799 106,376 02.10 20 10,563,102 2,018,774 528,155 100,939 03.10 23 12,422,376 2,237,144 540,103 97,267 04.10 21 11,727,404 2,297,176 558,448 109,389 05.10 20 11,687,220 2,044,941 584,361 102,247 06.10 22 12,078,374 2,105,077 549,017 95,685 07.10 22 12,026,682 2,048,366 546,667 93,108 08.10 21 11,844,742 1,875,604 564,035 89,314 09.10 20 11,709,209 1,922,821 585,460 96,141 10.10 20 11,670,480 1,926,574 583,524 96,329 11.10 18 12,060,974 1,939,169 670,054 107,732 12.10 23 14,336,536 2,394,584 623,328 104,112 Total 250 142,223,077 24,937,741 Average 568,892 99,751
Source: CBRT
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Box IV.1. Developments in IBAN Application IBAN, an international bank account number generated according to a nationwide standard length and structure, which will replace current bank account numbers, will allow money transfers to reach their beneficiaries fast and accurately by defining customer bank account numbers on an international scale. Communique on The International Bank Account Number No.2008/6 from the CBRT was published in the Official Gazette No. 27020, dated October 10, 2008 amended by Communique Amending Communique on The International Bank Account Number No.2009/10 was published in the Official Gazette No. 27437, dated December 19, 2009.
According to this Communique;
• The term “written”, concerning the property of the declaration that is required to be given to the bank in case the customer who wants to make the money transfer does not know the IBAN of the beneficiary, has been removed from the text of the Communique. This means that the declaration is required to be given in accordance with the property of the transaction. In order to fulfill his liability to confirm, the declaration is required to be recorded by banks. • The use of IBAN is not mandatory for banks and other financial institutions until 1.1.2012 when transferring money through their accounts in banks in Turkey.
Effective from 1.1.2010, it is mandatory to use the beneficiary’s and sender’s IBAN for money transfers made to an account and postdated orders through the TIC RTGS system. The IBAN usage ratio for the beneficiary’s account was 7.7 percent in December 2009, realized as 45.5 percent in January 2010 and reached 66.6 percent in December 2010 (Chart 1). After ceasing the declaration application, as customers will be required to use the beneficiary’s IBAN, the IBAN usage ratio for the beneficiary’s account will gradually increase.
Moreover, the IBAN usage ratio for the sender’s account was 88.5 percent in December 2009, realized as 98.2 percent in January 2010 and reached 98.7 percent in December 2010 (Chart 1). Although using IBAN for the sender’s account is mandatory, because of making money transfers that are not associated with an account, this ratio is unable to reach 100 percent.
Chart 1. IBAN Usage Ratio in TIC -RTGS System (%) 100
80
60
40
20
0 12.09 01.10 02.10 03.10 04.10 05.10 06.10 07.10 08.10 09.10 10.10 11.10 12.10
Beneficiary 's account (% ) Sender's account (%) Source: CBRT
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Cheque clearing operations, which play an important role in payment systems, are carried out by the Interbank Clearing Houses Center (ICH) under the oversight of the CBRT. As of end of the year 2010 out of 41 banks that participated in interbank cheque clearing operations, 5 were engaged only in cheque clearing with physical presentation, whereas the remaining 36 were also engaged in cheque clearing without physical presentation.
In 2010, the number of cheques, which were subject to the cheque clearing process in ICH, decreased by 3.3 percent and became 18.7 million compared to 2009 . In the given period, the value of cheques processed increased by 13.6 percent and became TL 228 billion (Chart IV.6).
Chart IV.6. Volume and Value of Cheques Transacted in ICH (billion TL, million)
250 30
25 200
20 150 15 100 10
50 5
0 0 06 07 08 09 10
V alue V olume (right hand axis)
Source: CBRT Analyzing the distribution of Cheques, especially used by Small and Medium-Sized Enterprises (SME) and by tradesmen, which assume an important place in Turkish trade, it is seen that cheques below TL 5,000 are presented intensively. Whereas the ratios of cheques presented to ICH below TL 5,000 and TL 10,000 were 61.8 and 80.9 respectively in 2009, these ratios became 57.3 and 78.0 in 2010. An analysis of trends of the last four years indicates that the decline in the number of cheques below TL 5,000. presented to the ICH became higher than that in the total number of cheques. While the number of cheques below TL 5,000 decreased by 37.7 percent in the 2007 2010 period, the total number of cheques went down by 27 percent in the same period. The said decline in the number of low amount cheques is attributed chiefly to the increase in the use of credit cards, and internet banking besides TIC RTGS. (Table IV. 3).
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Table IV.3. Distribution of the Number of Cheques Subject to Clearing According to Tranches TL 2.000 and TL 10.001- TL 50.001 and below TL 2.001-5.000 TL 5.001-10.000 50.000 above TOTAL 9,671,489 8,532,482 4,503,740 3,871,612 501,052 Cumulative Sum 9,671,489 18,203,971 22,707,711 26,579,323 27,080,375
2007 2007 % 35.71 31.51 16.63 14.30 1.85 Cumulative % 35.71 67.22 83.85 98.15 100.00 TOTAL 7,768,109 8,354,979 4,672,376 4,205,297 610,256 Cumulative Sum 7,768,109 16,123,088 20,795,464 25,000,761 25,611,017
2008 2008 % 30.33 32.62 18.24 16.42 2.38 Cumulative % 30.33 62.95 81.20 97.62 100.00 TOTAL 5,976,435 7,349,054 4,119,649 3,609,740 516,811 Cumulative Sum 5,976,435 13,325,489 17,445,138 21,054,878 21,571,689
2009 2009 % 27.70 34.07 19.10 16.73 2.40 Cumulative % 27.70 61.77 80.87 97.60 100.00 TOTAL 4,514,432 6,820,043 4,096,030 3,747,536 609,976 Cumulative Sum 4,514,432 11,334,475 15,430,505 19,178,041 19,788,017
2010 2010 % 22.81 34.47 20.70 18.94 3.08 Cumulative % 22.81 57.28 77.98 96.92 100.00 Source: ICH *Fractional cheque amounts, matching to the upper limit of the value tranches, are not included. Since the cheque clearing system operates according to the multilateral netting method, the liquidity requirement of participants arising from their cheque transactions is decreasing. In the cheque clearing system, the debit and credit positions of participants are determined by multilateral netting following the finalization of the provision operations. In 2010, the netting ratio of transactions realized through the cheque clearing system increased to 83.1 percent and the liquidity requirement decreased by TL 189.4 billion compared to the previous year (Table IV.4).
Table IV.4. Cheque Clearing System-Netting Ratio 2006 2007 2008 2009 2010 Netting Ratio (%) 74.8 77.8 79.3 80.4 83.1 Transaction volume (billion TL) 188.3 220.5 234.3 200.8 228.0 Liquidity Saving (billion TL) 140.8 171.6 185.8 161.4 189.4 Source: CBRT In the cheque clearing system, in order to finalize settlement, all banks that become debtors as a result of netting have to fulfill their obligations no later than 12:00 on the following business day. In 2009, delays in the cheque clearing system occurred once, and the total duration of delays amounted to 54 minutes. On the other hand, in 2010 no delays in the cheque clearing system occurred. (Chart IV.7). While the average settlement time in the cheque clearing system was 10:41 a.m. in 2009, favorable developments were observed in the system and the time of settlement became 10:25 a.m. in 2010.
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Chart IV. 7. Settlement Hours of the Cheque Clearing System – 2010
14:24
13:12
12:00
10:48
09:36 01.10 02.10 03.10 04.10 05.10 06.10 07.10 08.10 09.10 10.10 11.10 12.10
Realized Settlement Hour Expected Settlement Hour
Source: CBRT Currently, the use of debit and credit cards, which are widely preferred for payments, is becoming more widespread thanks to the adaptation of technological improvements in the payments system. The Interbank Card Center (ICC) was established in 1990 as a legal entity with the partnership of 13 banks in order to ensure interbank authorization, clearing and settlement and troubleshooting as well as carrying out strategic studies and improving rules and standards across the country regarding debit and credit cards in our country. Currently, the ICC has 10 partners and 27 members. ICC member banks clearing and settlement transactions are carried out by the ICC. Debts arising from netting in the ICC are settled at the CBRT.
Chart IV.8. Number of Debit Cards and Credit Chart IV.9. Number of ATM -POS (Thousand) Cards (Million)
80 25 2,000 1,800 70 20 1,600 60 1,400 15 1,200 50 1,000 40 10 800 600 30 5 400 20 200 06 07 08 09 10 0 0 06 07 08 09 10 Number of C redit C ards Number of Debit C ards Automatic Teller Machine (ATM) Point of Sale (POS) (right hand axis)
Source: ICC Source: ICC Developments in debit and credit cards, which are two leading non-cash means of payment, indicate that the use of these cards is becoming more widespread. The rate of increase in credit cards decelerated and the number of credit cards increased by 2.3 percent in 2009 compared to the previous years and became 5.8, reaching 47 million in 2010. In the same period, the number of debit cards continued to increase and reached 69.9 million with a rise of 8.1 percent (Chart IV.8). Due to widespread use of debit and credit cards in Turkey, the numbers of point of sale (POS) devices and automated teller machines (ATM) have also increased. In 2010, the number of POS devices rose by 4.9 percent to 1.8 million and the number of ATMs increased by 16.2 percent to 27.6 thousand (Chart IV.9).
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Chart IV.10. Volume and Value of Credit Card Chart IV.11. Volume and Value of Debit Card Transactions (billion TL, million) Transactions (billion TL, million) 1 250 2,500 240 800 200 2,000 700 200 600 150 1,500 160 500 100 1,000 120 400 300 50 500 80 200 40 0 0 100 06 07 08 09 10 0 0 V ol. of Purchase Trans. (right hand axis) 06 07 08 09 10 V ol.of C ash Withdraw al Trans. (right hand axis) V ol. of Purchase Trans.(right hand axis) V alue V ol. of C ash Withdraw al Trans.(right hand axis) V alue
Source: ICC Source: ICC
(1) Domestic and external use of credit cards issued in Turkey (1) Domestic and external use of debit cards issued in Turkey In 2010, the volume of credit card transactions rose by 10.7 percent while the value of credit card transactions increased by 15.5 percent compared to 2009 reaching 2.0 billion and TL 234.3 billion, respectively. The share of purchasing transactions within total credit card transactions in 2010 was 95.7 percent in volume and 91.4 percent in value (Chart IV.10).
Analysis of debit card transactions reveals that the volume of debit card transactions rose by 15.2 percent reaching 926.7 million; while the value of debit card transactions went up by 17.3 percent reaching TL 217.1 billion . The use of debit cards for cash withdrawal became 76.2 percent in volume and 96.4 percent in value. Yet, the use of debit cards for purchases remained at 23.8 percent in volume and 3.6 percent in value. Meanwhile, in recent years, the use of debit cards for purchases has displayed an increase, which is attributable to campaigns encouraging the use of debit cards to replace cash (Chart IV.11).
Chart IV.12. Volume and Value of Credit Cards Chart IV.13. Volume and Value of Debit Cards Processed in the Card Clearing System (billion Processed in the Card Clearing System (billion TL, million) TL, million)
120 1,000 10 250
900 100 800 8 200 700 80 600 6 150 60 500 4 100 400 40 300 2 50 200 20 100 0 0 0 0 04 06 07 08 09 10 04 05 06 07 08 09 10 V alue V olume (right hand axis) V alue V olume (right hand axis)
Source: ICC Source: ICC The volume of transactions subject to the credit card clearing process that rose by 5.0 percent in 2009, increased by 11.8 percent to 872.9 million in 2010. Meanwhile, the rate of increase in the value of transactions, which slowed down to become 13.7 percent in 2009, went up to 17.2 percent reaching TL 101.4 billion in 2010 (Chart IV.12). According to ICC data, the volume of transactions, which were subject to the clearing process of debit cards rose by 36.9 percent to 196.4
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million; while the value of transactions increased by 20.3 percent to TL 8.9 billion in 2010. The recent significant increase in the volume and value of transactions was mainly driven by the common use of ATMs, effective as of October 1, 2009, which allowed cardholders to withdraw money from the ATM of any bank (Chart IV.13).
Table IV.5. Card Clearing and Settlement System Chart IV.14. Ratio of Value of Credit Card / Netting Ratio (%) Transactions Subject to Clearing Process to Total Value of Credit Card Transactions (%)
2006 2007 2008 2009 2010 50 Credit Card Clearance and Settlement 47.6 48 Netting Ratio 81.7 78.3 76.5 78.1 77.4 (%) 46 Transaction volume 43.8 48 60 76 87 101 44 43.3 (TL billions) 42.7 42.7 Liquidity Saving (TL 39 47 58 68 78 41.2 billions) 42 Debit Card Clearance and Settlement 40 Netting Ratio 60.8 64.0 61.9 65.1 76.6 38 (%) Transaction volume 3.9 4.5 5.6 7.4 8.9 36 (billion TL) 05 06 07 08 09 10 Liquidity Saving 2.4 2.9 3.6 4.8 6.8 (billion TL)
Source: ICC Source: ICC As is the case with the cheque clearing system, the card clearing system also operates according to the multilateral netting method and therefore reduces the liquidity requirements of participants arising from card transactions. The netting ratio of credit card transactions realized through the system was 77.4 percent and the liquidity requirement relating to credit card transactions decreased by TL 78 billion in 2010. This same ratio was 76.6 percent for debit card transactions and TL 6.8 billion of liquidity savings was obtained (Table IV.5).
The decline in the ratio of the value of credit card transactions subject to clearing to total transactions for credit cards is mainly attributable to the tendency to use credit cards via POS and ATM devices of issuer banks as a result of the increase in the number of POS and ATM devices over the years and the promotions introduced. In 2009 and 2010, as the rate of increase in the value of credit card transactions subject to clearing was higher than the rate of increase in the total value of credit card transactions compared to the previous period, the ratio of the value of credit card transactions subject to clearing to total transactions for credit cards displayed a slight increase and reached 43.3 percent in 2010 (Chart IV.14).
The Istanbul Stock Exchange (ISE) Clearing and Custody Bank Inc. was established in 1988 within the ISE in order to provide settlement and custody of transactions. It became an independent company in 1992 and was transformed into a sector bank in 1996 under the name of Takasbank (ISE Settlement and Custody Bank Inc.). The functions of the Takasbank, which was established as an investment bank with the partnership of the ISE and its members, can be classified as follows:
• Clearing and settlement of transactions realized in the ISE,
• Acting as the central counterparty within the Turkish Derivatives Exchange,
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• Acting as the custodian of pension funds,
• Numbering securities issued in Turkey.
While the Takasbank directly participates in the TIC-RTGS and TIC-ESTS; however, brokerage houses have indirect access to TIC-RTGS and TIC-ESTS over Takasbank via Takasbank Electronic Transfer System (TETS). TETS encompasses securities and cash accounts at the ISE Settlement and Custody Bank besides all the transactions that can be performed within the ISE Settlement and Custody Bank.
The clearing and settlement of securities traded in all markets of the ISE is undertaken by the Takasbank. The clearing of transactions in the ISE is done according to the multilateral netting principle. Although the net liabilities are binding for parties, the Takasbank does not guarantee settlement. The Takasbank, which operates by the delivery versus payment principle, transfers securities upon the fulfillment of liabilities by participants.
Transactions of TL 635.08 billion were realized in the ISE Stock Market in 2010. Due to the fading effects of the global crisis coupled with the increasing demand towards emerging economies in stock markets, transaction volume in stock markets rose by 44.1 percent and 32.5 percent in 2009 and 2010, respectively (Chart IV.15).
Transactions of TL 3,458.47 billion were realized in the ISE Bonds and Bills Markets Outright Purchase and Sales Market and Repo Reverse Repo Market. In 2009 and 2010, transaction volume in the ISE Bonds and Bills Markets rose by 4.6 percent and 2.2 percent, respectively (Chart IV.16).
Chart IV.15. ISE Stock Markets Transaction Chart IV.16. ISE Bonds and Bill Markets Value (Billion TL) Transaction Value (Billion TL)
700 100 3,600 100 90 90 600 3,450 80 80 500 70 3,300 70 60 60 400 3,150 50 50 300 3,000 40 40 30 200 2,850 30 20 20 100 2,700 10 10 0 0 2,550 0 06 07 08 09 10 06 07 08 09 10 V alue Netting Ratio (right hand axis) Value Netting Ratio (right hand axis)
Source: ISE Settlement and Custody Bank Source: ISE Settlement and Custody Bank In 2010, within the Takasbank system, a payment of TL 50.1 billion was made through multilateral netting in the ISE Stock Market transactions. By 2010, the netting ratio regarding ISE Stock Markets became 92.1 percent and liquidity savings of TL 585 billion was made through multilateral netting (Table IV.6).
Meanwhile, in the ISE Bonds and Bills Markets Outright Purchase and Sales Market and the Repo-Reverse Repo Market, TL 635.5 billion was realized through multilateral
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netting. The netting ratio became 81.6 percent, providing the system with liquidity savings of TL 2,823 billion (Table IV.6).
Table IV.6. Netting Ratio regarding the Clearing of the Securities Traded at the ISE Stock Markets 2006 2007 2008 2009 2010
90.3 88.8 88.4 91.7 92.1 Netting Ratio (%)
Transaction volume 325.70 388.21 332.68 479.48 635.08 (Billion TL)
Liquidity Saving 294.10 344.90 294.22 439.64 585.00 (Billion TL)
Bonds and Bills Outright Purchase and Sales Market and Repo-Reverse Repo Market 2006 2007 2008 2009 2010
85.0 84.1 80.3 76.6 81.6 Netting Ratio (%)
Transaction Volume 2,919,90 2,934.88 3,236.01 3,383.50 3,458.47 (Billion TL)
Liquidity Saving 2,482.00 2,467.28 2,598.76 2,592.67 2,822.96 (Billion TL) Source: Takasbank The clearing and indemnification transactions of the Turkish Derivatives Exchange (TURKDEX) are carried out by the TURKDEX Clearing House within the ISE Settlement and Custody Bank, which was established in February 2005. The Takasbank functions as the central counterparty for TURKDEX. The clearing of contracts, the trading of which is undertaken within the markets at TURKDEX, besides transactions like inclusion into accounts, valuation, management and follow up of collaterals which are included in the duties of the clearing house are carried out by the Takasbank in accordance with the respective legislation.
Table IV.7. Information on the accounts of the Members of TURKDEX at the Takasbank Number of Accounts Number of TURKDEX Opened at the ISE Increase in Number of Accounts
Members Settlement and Custody (%) Bank system 2006 60 11,150 2007 79 25,160 125.7 2008 86 41,241 63.9 2009 84 56,702 37.5 2010 92 64,151 13.1 Source: Takasbank Institutions operating at the TURKDEX also become members of the ICH. Intermediaries, banks and agencies with the authority to trade derivatives are able to operate at TURKDEX. The number of TURKDEX members reached 92 by end 2010. The number of accounts opened by TURKDEX members became 64,151 by end 2010. The number of accounts opened increased by six times between the 2006 2010 period (Table IV.7).
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V. SPECIAL TOPICS
V.1. Limiting Volatility in Credit Market
A rapid process of credit contraction was experienced parallel to the economic crisis; however, the macro measures taken and the loose monetary policies implemented triggered the start of a rebound in the credit markets. The said rebound varied among countries. Surging capital flows and external financing facilities coupled with robust domestic demand and the base effect led to rapid credit expansion especially in emerging countries. In fact, in 2010 many advanced economies experienced a credit growth below long term averages; while emerging economies performed well to approach or transcend the levels of long term averages. Credit growth in the selected advanced economies has been 1.2 percent in real terms on average, which rose by 7.3 percent in emerging economies in 2010 (Chart V.1.1 and Chart V.1.2).
Chart V.1.1. Real Credit Growth Rate of Some Chart V.1.2. Real Credit Growth Rate of Some Advanced Economies (%) 1 Emerging Economies (%) 35 35 30 30 25 25 20 20 15 15 10 10 5 5 0 0 5 10 5 15 10 UK USA India Italy Brazil Israel Egypt Crotia Spain Russia Mexico Turkey Estonia Tailand France Greece Ireland Finland Bulgaria Austria Hungary S. Africa S. Malaysia Sweden Romania S. Arabia S. Belgium Portugal Colombia Argentina Indonesia Cambodia Australia Germany Denmark Czech Rep. Czech Luxemburg Netherlands Rep.of Korea Rep.of
Growth (2010) Average Growth (2002 2009) Growth (2010) Average Growth (2002 2009) Source: IMF-IFS (1) Credits mean the sum extended to the private sector by deposit Source: IMF-IFS banks. The rapid credit growth may create some negative effects on the macro economy and financial stability. Rising capital movements due to ample liquidity lead credits to be financed with short term funds and also increase banks’ reliance on such funds. Moreover, intense competition may lead to an increased risk of deterioration in credit portfolio quality, thereby also increasing the vulnerability of financial stability. Meanwhile, excessive credit growth may lead to an increase in asset prices through domestic demand; an increase in inflationist pressures due to overheating and a deterioration in the current account balance. As a matter of fact, many studies reveal that excessive credit growth is an important factor underlying financial crises especially in emerging economies (Kaminsky and Reinhart, 1999).
Credit growth is not undesirable as long as it is commensurate with country dynamics. However, great deviations from long term averages have negative effects on the economy in general and on financial markets. In fact, studies show that fluctuations in credit volume end up in crises (Bordo, 2001). In this context, social and economic costs of credit cycles due to domestic and international developments as well as structural factors in credit markets can be relatively high.
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Financial markets get more intensely affected by internal and external shocks than the GDP and developments in these markets propagate through the credit channel to the economy as a whole. However, boom and bust cycles in the credit volume are more frequent and severe than those in the GDP. The depth of the financial system is a determinant on the effect of these shocks on the economy. The depth of credit markets in emerging economies is lower than that in advanced economies. In fact, the ratio of credits to GDP was 144.8 percent on average in selected advanced economies, while it was 57.2 percent on average in selected emerging economies (Chart V.1.3 and Chart V.1.4).
Chart V.1.3. Loan/GDP Ratio of Some Advanced Chart V.1.4. Loan/GDP Ratio of Some Emerging Economies (%, 2010) 1 Economies (%, 2010) 1
250 250
200 200
150 150
100 100
50 50
0 0 … UK USA Peru Italy Spain Brazil Israel Egypt Crotia Crotia Ukrain Russia France Mexico Turkey Greece Ireland Finland Austria Estonia Tailand Sweden Rep. OfRep. Belgium Bulgaria Portugal Hungary S. Africa S. Malaysia Romania S. Arabia S. Australia Denmark Germany Colombia Argentina Indonesia Czech Rep. Czech Netherlands Source: IMF-IFS Source: IMF-IFS 2009 data for some countries. 2009 data for some countries. The lower depth in emerging economies’ credit markets compared to that in advanced economies leads the credit markets of these countries to react more against internal and external shocks and have a higher variance of credit growth (Chart V.1.5 and Chart V.1.6).
Chart V.1.5. Variance of Real Credit Growth Rate Chart V.1.6. Variance of Real Credit Growth Rate of Some Advanced Economies 1 of Some Emerging Economies 1 3 3
2 2
1 1
0 0
1 1
2 2 UK USA Italy Spain Brazil Israel Crotia Russia France Austria Greece Mexico Ireland Turkey Finland Estonia Tailand Sweden Bulgaria Portugal S. Africa S. Australia Hungary S. Arabia S. Romania Germany Denmark Colombia Indonesia Czech Rep. Czech Netherlands Rep.ofKorea Source: IMF-IFS Source: IMF-IFS (1) Variance of real credit growth rate is calculated by dividing the (1) Variance of real credit growth rate is calculated by dividing the standard deviations of the countries’ real credit growth rates between the standard deviations of the countries’ real credit growth rates between the 2002 2010 period to the average growth rate in the said period. 2002 2010 period to the average growth rate in the said period. Besides the monetary policy, micro prudential tools can also be resorted in order to curb expansion contraction movements in the credit volume. In fact, the studies undertaken so far indicate that the monetary policy (Bean et. al., 2010) and micro prudential tools cannot be solely effective in constraining credit cycles. In this scope, measures such as countercyclical buffer capital, dynamic
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Central banks monitor the economy from a macro perspective, so they target long term stability by keeping the credit growth rate that increases vulnerability at more reasonable levels. In this context, central banks aim to alleviate the effects of financial cycles through macro instruments. To this end, countries opt for institutional changes to implement the said measures that are called macro prudential tools. For example, the Financial Stability Oversight Committee (FSOC), the European Systemic Risk Board (ESRB) and the Financial Policy Committee (FPC) were established in the USA, the EU and the United Kingdom, respectively. In a study conducted by the IMF, it is deducted that in the absence of macro prudential tools, monetary policies need to respond more strongly than normal to avert cyclical movements in credit markets (IMF 2009).
Consideration of the damage to stem from fluctuations in the credit volume, implementation of macro prudential tools to contain this and the establishment of the institutional framework to secure this situation is quite important.
References:
Aikman, D., Haldane, A.G. and Nelson, B., 2010 “Curbing the Credit Cycle “, Bank of England. Bean, C., Paustian, M., Penalver, A. and Taylor, T., 2010, “Monetary Policy After the Fall”, http://www.bankofengland.co.uk/publications/speeches/2010/speech444.pdf Bordo, M., Eichengreen, B., Klingebiel, D. and Martinez Peria, M.S., 2001, “Is the crisis problem growing more severe?”, Economic Policy 16(1), ss 51–82. Coudert, V. and Pouvelle, C., 2008, “Is credit growth in central and eastern European countries excessive?” Banque de France, Quarterly Selection of Articles, No. 13. International Monetary Funds, 2009, “Lessons for monetary policy from asset price fluctuations”, World Economic Outlook, Chapter 3, October 2009. Kaminsky, G. L. and Reinhart C. M., 1999, “The twin crises: the causes of banking and balance of payments problems”, The American Economic Review, Vol. 89, No. 3, June.
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V.2. Stress Testing Methodology 7
In financial stability analysis, measurement and assessment of the vulnerabilities in the system against shocks is of great importance. In this context, in addition to the stress tests shared with the public since the first volume of the Report, in this exercise, credit, market, contagion and income risk are evaluated under some macroeconomic scenarios to identify the banks’ level of financial fragility.
This work, which links banks’ financial data with macroeconomic shocks under some scenarios, aims to test the resilience of the banking sector. The dynamic nature of the exercise provides a more realistic insight into banking sector vulnerabilities than sensitivity analysis or static stress test exercise. 8
In this new stress testing framework, using the 2010 year end data, two macroeconomic scenarios for 2011 12 are employed; one is the base case and the other is a hypothetical adverse scenario which assumes the sudden stop of capital inflows. The exercise is based on a “top down” approach for 49 banks, where the impact of macroeconomic shocks on banks’ financial statements are covered; thereby the potential risks that the sector is subject to are analyzed for a two year horizon.
The scenario driven figures for GDP, inflation, interest rate, exchange rate and unemployment are used as input to the econometric models, and in this way, housing prices, nonperforming loans and credit growth are estimated. Thus, credit and market risk are calculated using the financial statement data under each of the scenarios.
Table V.2.1. Variables used in econometric models
Credit Growth Model Nonperforming Loan (NPL) Model Housing Price Model Corporate Household Corporate Household
Lag of annual loan Lag of annual loan Lag of annual NPL Lag of annual NPL Lag of housing price growth growth growth growth index
Nominal GDP annual Annual change in Lag of annual GDP Lag of annual GDP Housing loans growth currency basket growth growth interest rates
Quarterly change in Lag of annual
currency basket unemployment rate
While measuring market risk the impact of interest rate and exchange rate shocks are applied. Banks’ trading portfolio securities are revalued based on the change in interest rates, and the resulting loss is categorized under interest rate risk. The yield curve is assumed to shift in a parallel fashion within this analysis. The exchange rate shock is calculated as the product of the change in the exchange rate and the banks’ net open foreign exchange position.
7 This work is an application of the methodology developed by Petr Jakubik, an economist at the European Central Bank, under the Component Two of the EU funded Euro sytem program “Strengthening Macro and Micro Prudential Supervision in EU Candidates and Potential Candidates”. In addition to providing the above mentioned methodology, he provided technical support during this process. 8 The dynamic feature of the employed framework is in line with the recently published methodology by the IMF “Schmieder, Ch., Puhr, C., Hasan, M. (2011): Next Generation Balance Sheet Stress Testing, IMF Working Paper 11/83” (http://www.imf.org/external/pubs/ft/wp/2011/wp1183.pdf ). ______Financial Stability Report – May 2011 58
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As for the credit risk, which is traditionally the key risk for banks, household loans and corporate loans are considered separately so that the parameters are estimated for each of them while linking them with the macroeconomic scenarios. Expected loan loss (EL) is calculated as a product of exposure at default (EAD), probability of default (PD) and loss given default (LGD), ( EL = EAD *PD*LGD).
EAD is estimated by using the credit growth model, whereas PD estimates are calculated by using the econometric model which links the NPL growth rates with the macroeconomic variables. In order to obtain PDs from NPLs the following formula is employed:
NPL t+1 = NPL t + PD t * PL t – r*NPL t (1)
In this formula PL t corresponds to performing loans (Loans NPL) , r represents the average write off (or sell out) rate, which is assumed to be 0.33 9 considering its relatively stable nature over the past few years. NPLs which are estimated via the abovementioned satellite models are ultimately converted to PD using the above mentioned equation (1). Finally, LGD is estimated using the housing price model which relies on the fact that the real estate usually serves as collateral, hence housing prices 10 are able to be a good proxy for the collateral values.
In order to account also for unexpected losses the Basel II Formula, which considers the change in risk weighted assets (RWA) is employed. In this way, the change in RWAs and the de/re leveraging effect are included in the analyses for the projected horizon.
After credit and market risk calculation, the available net income is used to cover these losses. If the income is not sufficient to fully absorb the losses emerging from the considered scenario, it is deducted from bank capital. Net interest income is computed as a sum of net interest income and non interest income. To reach the net income, the non interest income is projected as an average over the last three years. The interest sensitivity gap between assets and liabilities for different maturities is used to project the net interest income. After losses have been deducted from bank capital, a mapping of capital ratios into the probability of default of the respective bank is used to cover the interbank contagion risk. By deducting the resulting losses from capital of the affected banks the post contagion capital adequacy ratios are computed. 11
Moreover, policy reactions are not taken into account and, no additional capital is assumed within the 2 year horizon.
Within the general framework which is described above, shocks are applied to the Turkish banking sector. In 2012, while under the base case, the sector’s CAR falls to 14.6 percent mostly due to the credit growth; under the adverse scenario, remaining above the legal limit, the sector’s CAR declines to 9.2 (Chart V.2.1).
9 It implies that banks on average keep their nonperforming loans on their balance sheets for 3 years before they write them off or sell them out. 10 For housing prices, Garanti REİDİN index is used. 11 In this analysis, “maximum entropy principle” is assumed. For details, see: Upper C. and Worms A. (2004), “Estimating Bilateral Exposures in the German Interbank Market: Is there a Danger of Contagion?”, European Economic Review, 8, 827 49.09/02. 12 For a detailed analysis of the development of non core funding resources for the USA, Korea and this trend, see Shin (2010).
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Chart V.2.1. Scenario Outputs for the Banking Sector-CAR, NPL Ratio and Loan Growth
NPL Ratio CAR 40% Loan Growth 12% 25%
35% 10% 20% 30% 8% 25% 15% 6% 20% 10% 15% 4%
10% 2% 5%
5% 0% 0% 0% 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 Base Scenario Adverse Scenario
Source: CBRT calculations
All in all, under considered assumptions and adverse macroeconomic scenario resulting from sudden capital outflows cause significant deterioration in sector’s loans, NPL ratio, and capital adequacy. However, due to the sector’s current high assets quality and adequate capital buffer, the CAR remains above the legal limit of 8 percent even under this very severe adverse scenario.
Stress testing is an evolving discipline. Thus, central banks always tend to update and improve their stress testing framework taking into account the changing conjuncture and country specific conditions. Accordingly, the Central Bank of the Republic of Turkey closely follows, adapts and develops new approaches and uses the stress testing tool actively in financial stability analyses.
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V.3. Non-core Liabilities as a Systemic Risk Indicator
The liquidity glut that emerged due to the quantitative easing policies by advanced economies following the global crisis led to an increase in capital inflows towards emerging economies, which resulted in substantial credit growth.
The view that capital flows increase risks in the financial system thus, they need to be subject to stricter legal regulations has frequently been voiced in recent times. This approach defines banks as passive intermediaries that transform these types of funds into loans so as to meet the current credit demand. Suggesting an alternative approach for the examination of the structure of banks’ liabilities, Shin (2010) asserts that banks play an active role in the formation of financial bubbles. According to this approach, during credit booms, banks, which opt for relatively volatile funding resources with higher potential to generate liquidity risk in the future, increase the vulnerability of the banking sector against systemic risks. Thus, classification of banks’ liabilities regarding their potential to generate liquidity risk provides an important indicator regarding the strength of the financial system. In this context, the table below demonstrates the classification of core and non core balance sheet liability items (Table V.3.1).
Table V.3.1. Classification of Core and Non-Core Balance Sheet Liabilities
Core Liability Intermediate Non-core Liability
Household non-financial corporate Financial Institutions
Demand deposit Demand deposit Demand deposit at banks Liquid Short term savings deposit (up Short term commercial Funds from repo to 1 month) deposit (up to 3 months) Short term payables to banks Partially Medium term savings deposit (1 Time deposit Liquid month 1 year) Medium and long term Medium and long term payables to banks institutional commercial Long term savings deposit Issued securities Non-Liquid deposit (1 year and longer) Other borrowings from banks Core funding resources consist of resident households’ demand and time deposits. These funding resources, which are more reliable for banks, follow a relatively smooth growth trend, in line with the growth level of household wealth. However, during credit booms, when credit growth is larger than that of deposits, banks resort to alternative funding resources as well. As also stated above, a prevalent outcome of this trend is the increase in funding from foreign banks. These funds aggravate the fragility as they have a more sensitive structure against the fluctuations in global markets. Another important phenomenon is the rising borrowings from domestic banks. These two funding resources make up a vast part of the non core funding resources of banks and exhibit a more volatile nature compared to core liabilities.
Changes in borrowings from the domestic banks item have an asymmetric effect over the financial cycle. In relatively stable times of markets, interbank borrowings are considered to be important indicators of confidence in financial markets. However, in a period of crisis, banks can lower the borrowing limits among themselves, which may result in an abrupt liquidity squeeze.
Another important characteristic of non core liabilities is their procyclical behavior over business cycles. Credit booms, which mostly coincide with economic expansions, are accompanied by increases
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in non core funding resources 12 . The Dodd Frank Law, which encompasses elements to reduce macroprudential risks in the US financial system in the post crisis period also leads to higher taxation of financial institutions with relatively more non core liabilities 13 . Besides their income raising quality as for the fiscal policy, Shin (2011) suggests such a tax on non core liabilities also works as a prudential tool in dampening the procyclicality of the financial system, especially for emerging economies. External funds, which are effective in credit growth to a great extent, stand out especially in the borrowings from the foreign banks item among the liability items of banks (Chart V.3.1). The ratio of non core liabilities to M2 and to total foreign resources for Turkey is illustrated in Chart V.3.2. The rise in the said ratio halted during the crisis in 2008; but assumed a trend of fast rebound following 2010. An analysis of sub items indicates that repo transactions are mostly made of TL denominated ones and those made with the CBRT; while the borrowings from banks item that consists of a vast part of non core liabilities are made of borrowings from foreign banks.
Chart V.3.1. Non-core Funding Resources 1 Chart V.3.2. Non-core Funding Resources 1 150 34 24 32 23 22 30 100
Billion TL Billion 21 28 20 26 19 50 18 24 17 22 16 0 20 15 01 04 12 04 11 05 10 06 09 07 08 08 07 09 06 10 03 04 04 05 05 06 06 07 07 08 08 09 09 10
Payables to Banks Total Payables to Banks FX Noncore Liabilities/M2 (%) Funds From Repo Transactions Total Funds From Repo Transactions TL Noncore Liabilities/Total Liabilities (%) (rigth axis) Payables to Banks TL Funds From Repo Transactions FX Source: BRSA –CBRT. Source: BRSA –CBRT. 1) Quasi capital debts and security issuances are not included. Foreign 1) Ratios are displayed in 3 month moving averages. Total external currency and Turkish lira differentiation largely reflects the difference resources item expresses the total of liabilities item other than equities. between domestic and external concepts. The calculation of this ratio for Turkey poses a notable element of fragility. This is because the average share of non core funding resources within foreign resources is around 20 percent, while that of total deposits is around 70 percent, although it has currently risen for the financial system 14 ; the ratio of credits to deposits signals that credits are still mostly funded by deposits (Chart III.19); and measures to extend the maturities of liabilities have been put into effect (Box III.1).
Consequently, while funding of the banking sector still relies on core resources; the recent rise in the ratio of non core liabilities to M2, which shows a pro cyclical pattern, should be closely monitored within the context of macroprudential policies.
References
Shin, H.S. and K. Shin, (2010), “Procylicality and Monetary Aggregates”, unpublished paper. Shin, H.S. (2011), “Non Core Liabilities Tax as a Tool for Prudential Regulation”, policy note.
12 For a detailed analysis of the development of non core funding resources for the USA, Korea and this trend, see Shin (2010). 13 The Law also suggests a study of identification regarding core and non core liabilities. 14 Average ratio of deposits within total liabilities is around 60 percent. ______Financial Stability Report – May 2011 62
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V.4. Transfer of the Activities of the Central Bank Risk Center to the Banks Association of Turkey
In many countries, systems are established to compile and disseminate risk data with a view to determining the risks assumed by credit agencies; providing inspection and surveillance and securing smooth operation of the credit system. Risk data are collected solely by public authorities in some countries; whereas they are followed only by private credit rating agencies in some. Meanwhile, many countries have adopted a mix model employing both the public and private institutions. For example, Belgium, France and Indonesia are some of the countries with only public credit registration centers; while the USA, Canada, Holland, the United Kingdom, Switzerland and Poland are those with only private credit bureaus; and Germany, Austria, Bulgaria, Italy, Spain, Portugal, Malaysia, Argentina, Brazil and Mexico are countries with mixed structures. Public credit bureaus may diversify with regard to their purposes of establishment. While these data are considered as a part of banking inspection and surveillance in some countries, currently, monitoring of the history of borrowing come to the forefront as the most significant function.
Historical Development of the CBRT Risk Center
As stipulated in the Repealed Article 44 of Central Bank Law No:1211, the aim of the Risk Center is to ensure the customers or loan applicants of banks and financial institutions continuously see the updated total amount of credits over the financial system as a whole and assist them in their credit decisions.
The CBRT Risk Center was established in 1951 at the İstanbul Branch and started offering services to the branches of banks in that district. As the number of branches of the CBRT increased in the country, the Center was moved to the Ankara Branch and its catchment area was widened to include bank branches in the rediscount areas. Currently, the CBRT Risk Center provides services all over Turkey.
Parallel to the deepening of our financial system and improvements in financial institutions, the number of participants in the system increased over time. Although the participants of the Risk Center were initially only banks, as of June 2000 factoring and financial leasing companies; as of February 2005 consumer financing companies; and as of October 2007 asset management companies were included in the system.
The way notification to the Risk Center is done has also evolved parallel to improvements in the tools of communication. Information on the banks’ credit limits and risk, which were sent to the Risk Center in written form until 1989, were transmitted via tapes, diskettes and cartridges until the first half of 1998; and started to be sent via the electronic data transfer system as of the second half of 1998.
The types and contents of data transmitted to the Risk Center has increased over time and in order of occurrence credit limit and risk information, protested bills, identification data of retail loan
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defaulters and lastly information on bad cheques in line with Law No. 5941 have been centralized at the Risk Center and started to be shared with participants.
Currently, the Risk Center has 177 participants consisting of 48 banks, 11 consumer financing companies, 6 asset management companies, 36 financial leasing companies, 75 factoring companies and Credit Guarantee Fund Inc. Besides, two institutions that provide information resources, namely the Savings Deposit Insurance Fund and Capital Markets Board.
Data collected at the Risk Center comprises not only of data that is considered by lenders in their decisions; but they are also actively used in macroeconomic assessments and analyses; in the decision making processes of policy makers and in informing the public. In this context, important data such as the sectoral and geographical distribution of credits; developments in the number of credit defaulters as well as protested bills by periods; the number of bad cheques are shared with the public as they are gathered.
Removal of the Risk Center from the CBRT and the Transfer of its Activities to the Banks Association of Turkey
As the financial sector improved and deepened, and transactions gradually became more complicated, more sophisticated methods to assess the creditworthiness of borrowers have begun to be used. Therefore, so as to apply different prices according to the risk levels of companies for loan extension via the Risk Center, diversification of the data base regarding the information required for banks to get a better assessment of the companies; fostering the infrastructure of the Risk Center in this context; and the execution of studies to instantly meet the sector’s needs through updated information were needed.
Under the scope of Basel Committee on Banking Supervision exercises, it has recently become important for banks to develop their own internal control mechanisms to estimate the risks of the banking sector and to alleviate the possible unfavorable effects. On the other hand, enhancement of inspection and surveillance of the banking system and implementation of the required stress tests to detect the fragility of the sector, foresight of risks and development of policies are needed.
Moreover, in order to facilitate the financing of trade and enhance its efficiency, the need to share the information collected at the Risk Center by third persons concerned, other than financial institutions has emerged .
Needs have changed parallel to developments in the Turkish financial sector. Given that the surveillance duty of the CBRT has ended and the activities of the Risk Center are not included in the basic tasks of central banks, these activities are to be undertaken by an institution other than the CBRT, as is the case with some other countries. Thus, considering that approximately 88 percent of the financial system consists of banks, it was assessed that the activities of the Risk Center can be implemented by the Banks Association of Turkey, which is a professional organization with the status of a public institution founded as per Banking Law No.5411.
Under this scope, according to Law No.6111, which was accepted by the Turkish Grand National Assembly on 13 February 2011 and enforced by being published in Official Gazette no 27857
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(Repeated issue) on 25 February 2011, the Risk Center was established at the Banks Association of Turkey and the provisions regarding the Risk Center stipulated in Article No. 1211 of the CBRT Law were annulled.
In the transition period until the fulfillment of arrangements regarding the transfer of the activities of the Risk Center, it was decided that these would to be undertaken by our Bank as per repealed Article 44 of Law No 1211.
The amendments introduced to the Risk Center by the said Law are summarized below;
i. All rules and procedures regarding the establishment, activities and functioning of the Risk Center; formation, gathering and decision taking of the Risk Center management; the scope, style and contents and dissemination of the received information; the scope, content and pricing of information to be shared besides setting the contribution fee shall be arranged by a regulation for which the assent of the BRSA and the CBRT will be sought.
ii. Under the current arrangement, participants of the Risk Center are explicitly specified in the Law as credit agencies, development and investment banks and other financial organizations; whereas in the new arrangement, they are stated as credit agencies and financial institutions that will be considered eligible by the BRSA.
iii. The Risk Center shall be directed by a management of 9 members with a 3 year term of office; and one member within this management shall be appointed by the BRSA and the CBRT from among their staff.
iv. In line with the establishment purposes of the Risk Center, demands for information from legal entities of private law, public institutions and organizations and vocational organizations of public body quality and superior institutions thereof are by arrangement as per the assent of the BRSA. On condition that persons who have information about them held at the Risk Center give their consent for the disclosure of this information, the sharing of risk information with agreed parties has become possible. Rules and procedures regarding the dissemination of information with this person’s consent shall be laid down by a regulation to be formulated with the assent of the BRSA and the CBRT. Within this scope, real and legal persons will be able to receive risk information on condition that their liabilities against retail sales companies, electricity, water, natural gas and telecommunications institutions are collected by the Risk Center; and their clients give consent to the Risk Center in response.
v. The Risk Center can be inspected by the BRSA, when needed.
vi. The Risk Center shall perform all kinds of exchange of information as per Article 73 of the Banking Law according to contracts made through companies established by at least five banks.
vii. Information stored in the Risk Center shall be received by the BRSA and the CBRT in the requested format and content and shall continue to be used in assessments and analyses.
The Risk Center is required to receive information from participants following the formulation of the regulations regarding the establishment of the Risk Center and dissemination of the information
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upon consent within 1 year at the latest and the publication of these regulations in the Official Gazette.
Following the completion of the technical infrastructure of the Risk Center at the Turkish Banks Association, information on credit limits and risk, protested bills and bad cheques besides all data relating to bad retail loans held at the CBRT shall be transmitted to the Risk Center of the Banks Association of Turkey; and activities of the Risk Center at the CBRT shall be terminated.
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V.5. Interest-free Banking at a Glance
Although the intellectual foundations of interest free banking were previously laid, the notion of interest free banking became institutionalized parallel to the establishment of the Islamic Development Bank in 1975, which aims to finance development projects in Islamic countries in accordance with Islamic rules. The sector grew so fast in subsequent years in line with the participation of many private banks and has currently reached an asset size of USD 1 trillion and a global potential of USD 4 trillion 15 .
The Muslim population has reached 1.6 billion. Their demand for financial instruments that comply with Islam has been influential on such a high rated growth in interest free banking and the finance sector. Basic principles that these institutions should consider to meet the demand can be summarized as: (i) bewaring of interest based transactions, (ii) bewaring of excessive uncertainty and risky transactions, (iii) not financing the sectors prohibited by Islam 16 .
In the context of these basic principles, leading loan/fund lending methods developed by non interest financial institutions are murabaha, which is a type of sales; mudaraba, which is basically an investment partnership; musharakah, which is sharing of profits losses; ijarah, the corresponding term for financial leasing in conventional banking; and salam, which is a method by which parties agree in the purchase sales of a commodity at a future date at a certain price that is paid completely at the time of the agreement.
Interest free banking institutions differ in their exclusive credit/fund lending methods besides fund collection methods. Some of these are current accounts of any currency, in the form of demand deposits with no returns like dividends; participation accounts, which can be defined as time deposit accounts of non interest banks and sukuk certificates, which are defined as “non interest bills” due to the prohibition of obtaining and giving interest by Islamic rules.
Interest free banking institutions can issue sukuk s of different types relying on the assets they build up with the above listed different methods. In general, the financial institution transfers an asset it owns in order to issue sukuk to a company it establishes. Then the company finances the asset through the income it obtains from sukuks it issues relying on this asset. The company that issues sukuk after the financial institution leases the asset it transfers and finances the periodical payments of sukuk certificate through the rent it obtains. When the Sukuk certificate is due, the financial institution takes the asset back, pays the certificate holders capitals with this money and finalizes the transaction. Besides being interest free, sukuk differs from bills as it also consists of the ownership of the asset, which is the subject to the certificate.
The fulfillment of transactions in interest free banking in close relation with the real economy, aversion to high risk and uncertainty, the direction of funds to areas that mostly generate production and employment enables interest free banking to play a role in supporting financial stability.
15 BMB Islamic, Global Islamic Finance Report 2010 16 TKBB, “Principles of Interest Free Banking and Participation Banking” http://www.tkbb.org.tr/download/faizsiz_bankacilik_onyilmaz.pdf Financial Stability Report – May 2011 ______67
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Nevertheless, due to their operating principles, non interest financial institutions are faced with greater limitations in meeting their liquidity requirements compared to conventional banks. There are many financial instruments in the conventional banking system, which banks can employ in liquidity management with the contribution of an advanced interbank market. Interbank markets provide banks with great flexibility in the arrangement of short term cash flows. In addition, secondary markets where financial instruments are traded are noteworthy facilities regarding liquidity management.
As all the conventional liquidity management facilities like the interbank market, secondary market instruments and the rediscount window of central banks as lenders of last resort are based on interest, they cannot be employed by Islamic banks. In order to solve this problem, the use of sukuks defined as “non interest bills” has become widespread. Sukuk issue decreased on a global scale due to the economic contraction in the crisis period; but retrieved pre crisis levels in 2010. In addition to the rise in total amount, the remarkable increase in quantity is an indicator of the increasing popularity of sukuk markets (Chart V.5.1). In fact, in many countries including Turkey, the first sukuk issue was made in 2010; and the same was planned by many other countries for the year 2011 17 . If the distribution of issues in global sukuk markets is analyzed in units of currencies, South East Asia (especially the Malaysian Ringgit) stands out as a dominant region (Chart V.5.2).
Chart V.5.1. The Number and Amou nt of Sukuk Chart V.5.2. Currency Unit of the Sukuk Issued Issued (2010)
60 800 1% 4% 1% 700 4% 50 600 40 11% MYR 500 USD 30 400 SGD 300 20 200 PKR 10 100 BHD
0 0 Other 2005 2006 2007 2008 2009 2010 79% Amount (USA Billion Dollars) Number (Right Axis) Source: IFIS Source: IFIS These developments in the international sukuk market proliferate liquidity management opportunities, while some international mechanisms intended for handling the problem are being formulated simultaneously. In this framework, the International Islamic Liquidity Management Corporation– IILM was established, of which the Central Bank of the Republic of Turkey is one of the founders. The objective of the initiative in question is to establish an international asset pool with Sharī`ah compliant revenues and to regularly issue high rated, simple, internationally recognized sukuk that can be traded on secondary markets and intended to meet the liquidity needs of interest free banking institutions in member countries. The initiative, which was started on 25 October 2010, is still in progress and the main benefits expected from the initiative are: facilitating liquidity management of interest free banks, facilitating the development and integration of interest free
17 IFIS, Global Sukuk Market H2 2010 Report ______Financial Stability Report – May 2011 68
TÜRKİYE CUMHURİYET MERKEZ BANKASI interbank markets and establishing a risk free indicator for effective pricing of other products by regularly issuing sukuk. Moreover, the IILM will possibly facilitate the liquidity management of institutions offering Islamic financing services in case of a squeeze and thus counterbalance the said institutions’ competitive power against conventional banks. The striking point regarding the working principle of the IILM is that assets are transferred to the IILM via central banks. The reason for that can be explained as an effort to safeguard the quality of assets and lease payments (in case of leaseback). The IILM has not reached a consensus on another method for drawing assets from the assets pool. All kinds of financial and non financial assets that are compliant with Islamic rules will be accepted in this pool of assets and instruments issued will have a credit rating of AAA, be in a form that is easily comprehended and accepted, be issued regularly in small volumes, be globally recognized, convertible and will have different maturities .
Parallel to the growth of interest free banking on a global scale, the institutions which first started to operate in Turkey in 1986 under the name of “special finance institutions”, were described as “participation banks” in the Banks Act No: 5411 in 2005; and participation funds have grown by 295 percent, while credits have grown by 376 percent since 2005. While the assets of participation banks accounted for 2.5 percent of the entire sector in 2005, this ratio reached 4.3 percent in 2010. Again, in the same period, the assets of other banks grew by 149 percent, while those of participation banks grew by 335 percent (Chart V.5.3). A growth similar to the one in the balance sheet items of participation banks was also observed in the number of branches and staff of the said banks (Chart V.5.4).
Chart V.5.3. Growth of Assets, Loans and Chart V.5.4. Growth in the Number of Branches Deposits of Participation Banks (Billion TL) and Staff of Participation Banks
50 5 14,000 700
40 12,000 600 4
30 10,000 500 3 20 8,000 400
2 10 6,000 300
0 1 4,000 200 2005 2006 2007 2008 2009 2010 2005 2006 2007 2008 2009 2010 Total Assets Participation Funds Number of Employees Loans Share of Assets (%)(Right Axis) Number of Branches (Right Hand Axis)
Source: CBRT Source: CBRT A major breakthrough in the interest free banking sector in Turkey was the Capital Markets Board’s “Communiqué on the Principles Regarding Ijara Certificates and Asset Lease Companies” of April 1, 2010. The ijara certificates enable private sector companies to provide financing using the assets that they own or they are assigned by leasing, via an asset lease company by employing the “assign lease to be assigned” method. At the onset, the asset management company finances the assets that are assigned to it via the ijara certificates that it will issue. The periodic payments of the said certificates are made out of the returns from the said lease transferred by the bank. At the end of
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the lease term, the returns from the said assets that are assigned back to the bank are paid to ijara certificate holders in proportion to their shares, and thus the ijara certificates are redeemed. The arrangement regarding this interest free instrument also called the ijara sukuk, soon generated impacts and the Turkish banks have become players in the sukuk market with the first sukuk issued in the participation banking sector in 2010. Taking into account the significant amount of capital looking for a safe investment environment due to the unrest in the Middle East, sukuk issues in Turkey are expected to continue and grow further in the upcoming period.
The revenue indexed bonds (RIB) issued by the Undersecretariat of Treasury also assume a prominent role in the liquidity management of interest free banking. These bonds can be utilized by participation banks, as they are interest free and indexed to revenue shares that are generated by State Owned Enterprises and transferred to the budget. It was announced that revenue shares for 2011 will be the base for the maximum return to be paid by the coupons of the bond and the revenue projection provided in the Budget Law is TL 332.9 million 18 .
18 Undersecretariat of Treasury http://www.hazine.gov.tr/doc/GES/Ges_brosur.pdf ______Financial Stability Report – May 2011 70
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V.6. The Maturity Structure of Deposits
The primary funding source of the banking sector is deposits/participation funds. Banks’ deposits/participation funds subject to required reserves, which were TL 617 billion in March 2011, account for 60 percent of total funds. The maturity of deposits/participation funds, which is generally up to three months, is shorter than those of loans and securities that comprise the biggest share in assets. The maturity mismatch exposes the sector to liquidity and interest rate risk and increases the vulnerability of the banking system. The Turkish lira required reserve ratio has been differentiated according to the maturity structure of deposits/participation funds with a view to extending the maturity of resources of the banking system, mitigating maturity mismatch and underpinning financial stability. Within this framework, higher required reserve ratios have been introduced for short term deposits/participation funds and thus, the margins between short and long term deposits have been widened.
Similarly, FX required reserve ratio has been differentiated according to the maturity of FX deposits/participation funds and other liabilities, and both Turkish lira and FX required reserve ratios have been raised for short term liabilities.
The average maturity of deposits/participation funds has started to be extended following these developments. While the share of deposits/participation funds up to 1 month maturity decreased, the share of deposits/participation funds with a maturity of 3 months and longer displayed a rise. The weighted average maturities of Turkish lira and FX deposits/participation funds, which were 48.2 and 67.3 days at the end of 2010, reached 61.1 and 73.3 days in April 2011 (Chart V.6.1 and Chart V.6.2).
Chart V.6.1. Breakdown of Turkish lira Chart V.6.2. Breakdown of FX Deposits/Participation Accounts by Maturities 1 Deposits/Participation Accounts by Maturities 1 100 70 100 90 90 60 90 80 80 80 70 50 70 70 60 G G ( 60 40 ( 60 50 50 50 % ü % ü ) 40 30 ) 40 40 n 30 n 30 20 30 20 20 20 10 10 10 10 0 0 0 0 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 04.11 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 04.11 Sight Sight Up To 1 Month Up To 1 Month Up To 3 Month Up To 3 Month Up To 6 Month Up To 6 Month Up To 1 Year Up To 1 Year 1 Year and More 1 Year and More Weighted Average Maturity (Right Hand Axis) Weighted Average Maturity (Right Hand Axis) Source: CBRT Source: CBRT (1) The average maturity for deposits with a maturity up to 1 month, 1 3 (1) The average maturity for deposits with a maturity up to 1 month, 1 3 months, 3 6 months and up to 1 year and longer have been assumed to months, 3 6 months and up to 1 year and longer have been assumed to be 15 days, 60 days, 135 days and 360 days, respectively. be 15 days, 60 days, 135 days and 360 days, respectively.
All bank groups contributed to the extension of the weighted average maturity of Turkish lira deposits/participation funds in the banking sector. The weighted average maturity of FX deposits/participation funds was extended too, albeit not as much as Turkish lira deposits/participation funds (Chart V.6.3 and Chart V.6.4).
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Chart V.6.3. Weighted Average Maturity of Chart V.6.4. Weighted Average Maturity of FX Turkish lira Deposits/Participation Accounts 1 Deposits/Participation Accounts 1 65 130 80 130 120 75 120 60 110 70 110 55 100 65 100 90 60 90 50 80 55 80 45 70 50 70 60 45 60 40 50 40 50 35 40 35 40 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 04.11 12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 04.11 State Private Private Foreign Foreign Sector Sector State (Right Hand Axis) Participation (Right Hand Axis) Participation (Right Hand Axis) Source: CBRT Source: CBRT (1) The average maturity for deposits with a maturity up to 1 month, 1 3 (1) The average maturity for deposits with a maturity up to 1 month, 1 3 months, 3 6 months and up to 1 year and longer are assumed to be 15 months, 3 6 months and up to 1 year and longer have been assumed to days, 60 days, 135 days and 360 days, respectively. be 15 days, 60 days, 135 days and 360 days, respectively.
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V.7. Bond and Bills Issued by the Banking Sector
With the Banking Regulation and Supervision Agency’s Resolution No: 3875 dated 30.09.2010 that was promulgated in Official Gazette No: 27717 dated 02.10.2010, deposit banks, which were formerly allowed to issue bills and bonds abroad only, were allowed to issue bills and bonds in the domestic market as well. As per the Resolution, banks shall issue TL denominated bills and bonds regardless of if they are offered to the public according to the principles and procedures determined below. a) The capital adequacy ratio of the issuer Bank shall not be under 12% as of the date of application, b) In issues which will be in the form of public offerings, especially small investors shall be informed in detail and in writing that the amount borrowed via the issue is not covered by the Saving Deposit Insurance Fund with the aim of avoiding any misunderstanding that the money invested is within the scope of insurance like saving deposits or participation funds, c) Prior to the issue, the Bank shall present to the Agency a report including the benefit and cost analysis, the impact of the issue on the Bank’s financial structure, detailed evaluations concerning risks which may emanate from the issue taking into account the possible stress conditions as well as the code of practice to be followed to measure, monitor and control these risks, d) The issuer Bank shall not have contradicted the corporate management provisions and protective provisions stipulated in Banking Law No: 5411 prior to the issuance, or in case of contradiction, the contradiction detected shall have been corrected, e) The nominal limit concerning the issuances, which will be carried out directly in the capacity of the borrower Bank, shall be calculated according to the formulae described below, and the development and investment banks shall be exempted from this limit,
ASCIL= MIN (MAX (0,5* Equities;0,25*Savings Deposit);Equities)
Issue Limit = MIN (ASCIL*(1 (TAB/TAS)*5 +MAX (0;(MIN(0,2;CAR) 0,12))*2); Equities)
ASCIL: Amount Subject to the Calculation of Issue Limit
Equities: The amount of equities of the bank stated in the latest non consolidated year end or interim financial reports as of the date of application.
Savings Deposit: Total amount of savings deposit accounts or participation fund accounts of real persons to be calculated according to information contained in the latest non consolidated year end or interim financial reports as of the date of application.
TAB: Total assets of the bank that is announced in the latest non consolidated year end or interim financial reports as of the date of application.
TAS: Total assets of the sector announced by the Agency as of the date the total assets of the bank are taken into account.
CAR: Capital adequacy ratio (%) stated in the latest non consolidated year end or interim financial reports as of the date of application.
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f) Securities to be issued within the scope of subordinated debt as well as mortgage and asset covered bonds shall be excluded from the issue limit, g) The nominal amount of issues, which were made earlier by banks and which are still in circulation, shall be considered as a discount item while calculating the new issue limit.
Deposit banks have issued bills and bonds with a nominal value of TL 6.8 billion in the domestic market since the Resolution was enacted and the weighted average maturity of the issues was 252 days. Applications of the banks to issue new domestic bills and bonds with a nominal value of TL 9.7 billion have been registered by the Capital Markets Board (CMB); the banks shall issue these bills and bonds within one year at the latest upon registration. There are also other applications with a nominal value of TL 1.9 billion to be waiting for the registration of CMB (Table V.7.1).
Meanwhile, the nominal value of bills and bonds issued by banks abroad reached USD 3.3 billion and the weighted average maturity of these issuances is 6 years. Bonds with a nominal value of USD 3.2 billion have been registered by the CMB but they have not yet been issued. Applications to issue bills with a nominal value of USD 1 billion have also been made to the CMB for registry (Table V.7.1).
Table V.7.1. Developments Regarding Bill and Bond Issues of Deposit Banks
Domestic Abroad Nominal Amount (Million TL) (Million USD) Bills and bonds that are registered by CMB and issued by deposit banks 6,800 3,300
Bills and bonds that are registered by CMB but not yet issued 9,700 3,200
Bills and bonds that are applied to CMB for registration 1,900 1,000
TOTAL 18,400 7,500 Source: CMB, PDP (Public Disclosure Platform) According to the balance sheet data announced on May 26, 2011, deposit banks issued bills and bonds worth approximately TL 6.8 billion in the domestic market and approximately USD 5.1 billion abroad; meanwhile, development and investment banks issued TL 443 million worth of bills and bonds; and thus the share of bills and bonds issued by the banking sector in total liabilities became 1 percent. These issuances are believed to facilitate diversification of the resource structure of the banking sector, extend maturities and mitigate maturity mismatch via the availability of resources with longer maturities. It is expected that bills and bonds issues will further increase, however, in light of available data, their share in total liabilities is expected to remain around 5 percent due to issue limits.
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V.8. The Institutional Framework Regarding Macroprudential Policies
The concept of financial stability, which is an important prerequisite for both macroeconomic stability and price stability, has been at the top of the agenda recently. Failure to accurately understand the risks, especially those stemming from complex financial instruments and supervisory authorities’ negligence of the relationship between the financial sector and other sectors during the crisis led to a rapid accumulation of systemic risk in financial markets. Meanwhile, the crisis revealed that the microprudential approach focusing on the position of financial institutions and disregarding the cross sectoral relations was not adequate on its own and in this context macroprudential policies have come into prominence, as well. Upon the global consensus on the necessity to act proactively against risks in the system, macroprudential policies will inevitably become more significant in the upcoming period.
The primary objective of macroprudential policies, which are complementary to microprudential ones, is to prevent or restrain the negative effects of systemic risk on the financial system and the economy. Actually, macroprudential policies contain two pillars: “counter cyclical policies” and “curbing contagion effects”. The aim of counter cyclical policies is to make the excessiveness driven by pro cyclicality more controllable. Curbing the contagion effects means preventing the spread of any problem that has emerged in a specific sector or firm to the whole system by implementing active policies. Unlike the former one, the objective of the second pillar is to restrain the effects of any crisis and prevent it from turning into a systemic one.
Within this framework, it can be asserted that macroprudential policies have two dimensions: the objective of the “time dimension” is to detect prospective risks in the system and to prevent these risks from accumulating throughout the system over time. Accordingly, the objective of counter cyclical macroprudential policies is not ensuring their implementation at a specific time, but ensuring that risks are monitored continuously and protecting the whole system from such risks in time for as long as possible. The objective of the second dimension, the “cross sectoral dimension”, is to detect the impact of any risk at a given time and to prevent the risk from pervading the whole system. The policy implemented here necessitates taking measures commensurate with the risk that emerges and revising the policy once the risk has been dissipated.
While designing macroprudential policy tools, the objective (such as suppressing excessive credit growth or reducing indebtedness ratios in the system) should be clearly defined. Once the objective is clearly defined, the policy instruments that can be employed to achieve the objective should be specified and the impacts of these instruments on the sector and the economy should be set.
The point that deserves highlighting here is that macroprudential policies are not substitutes for macroeconomic policies, but complementary to them. Moreover, there is no “one size fits all” solution for the implementation framework and institutional structure of these policies. The specific economic, political and institutional structure of each country should be taken into account to be able to draw the best structure for that country. Accordingly, determining the primary objective of macroprudential
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policies and the instruments to be employed are thought to be important for designing the institutional structure. Besides, Determining a communication strategy and accountability principles as well as measuring and evaluating the effectiveness of policies are other important issues regarding the design of macroprudential policies.
Clearly, there are some challenges in terms of institutional structure and coordination. Firstly, the financial sector is a very dynamic one. The macroprudential polices necessitate continuous monitoring of a wide set of data, determining the systemically important institutions and following new products. Moreover, the policies demand that authorities develop a flexible response to risks.
As financial stability has regional and global reverberations, while implementing macroprudential policies country specific conditions shall be taken into account without ignoring the international framework. Therefore, an effective international coordination is crucial in this process.
In the international arena, institutions such as the IMF, BIS and FSB are carrying out important studies about institutional structure to implement the macroprudential policies. In line with this, it has recently been observed that some changes have occurred in the existing institutional structures of some countries for monitoring systemic risks and implementing macroprudential policies. Some of these countries are analyzed in detail below:
United States of America (USA)
In the USA, macroprudential arrangements were substantially re regulated with the “Dodd Frank Wall Street Reform and Consumer Protection Act”. The Act established the Financial Stability Oversight Council – FSOC. The FSOC is composed of ten voting members (The Secretary of the Treasury, who serves as the Chairperson of the FSOC, the Chairman of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Director of the Consumer Financial Protection Bureau, the Chairman of the Securities and Exchange Commission, the Chairperson of the Federal Deposit Insurance Corporation FDIC, the Chairperson of the Commodity Futures Trading Commission, the Director of the Federal Housing Finance Agency, the Chairman of the National Credit Union Administration Board, and an independent member with insurance expertise that is appointed by the President and confirmed by the Senate for a six year term) and 5 non voting members. While the Act underscores the importance of macroprudential arrangements, the details pertaining to implementation is entrusted to the regulatory authorities.
The FSOC, which was established with a view to addressing the need to evaluate all the structural vulnerabilities and shocks that the financial system is exposed to with a holistic approach, undertakes communication and cooperation mechanisms between oversight and supervisory authorities concerned. Thus, the mandate gaps regarding financial stability, which were also stated in the FSAP Report of the USA, have tried to be addressed as well.
The law furnished the Council with the following duties and powers:
• Facilitate Regulatory Coordination
• Facilitate Information Sharing and Collection
• Designate Nonbank Financial Companies for Consolidated Supervision
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• Designate Systemic Financial Market Utilities and Systemic Payment, Clearing, or Settlement Activities
• Recommend Stricter Standards
• Break Up Firms that Pose a “Grave Threat” to Financial Stability
• Recommend Congress close specific gaps in regulation.
The Act also established an authority the Consumer Financial Protection Bureau to regulate and supervise all consumer financial products within the Federal Reserve System with an aim of protecting the rights of consumers more effectively. The Bureau is vested with the power to set and enforce rules regarding these financial products. Formerly, a federal authority for insurance supervision did not exist and the Office of National Insurance established within the Treasury will monitor all aspects of the insurance sector.
Lastly, the Act abrogates the Office of Thrift Supervision and all of its duties and powers are transferred to FDIC and the OCC. The primary objective of this rearrangement is to remedy the multipartite structure of the supervision.
United Kingdom
The tripartite regulatory system composed of the Financial Services Authority – FSA, the Bank of England BoE and the Treasury was accused of being multipartite and a source of confusion of power. In July 2010, a proposal was made to the public to transfer the duties and powers of the FSA to the BoE; to establish a separate authority to protect the rights of consumers and investors and hence to have only one authority responsible for the implementation of macroprudential policies in the system. The revised draft amendment was issued on February 2011. The plan proposed by the Government has led to three major changes:
• A strong Financial Policy Committee FPC responsible for macroprudential policies and regulation and identifying risks across the financial system has been established within the BoE.
• An operationally independent Prudential Regulation Authority PRA, which is responsible for microprudential supervision, has been established as a subsidiary of the BoE and the duties and powers of the FSA are transferred to the PRA.
• A separate supervisory authority focusing on the rights of consumers and investors – Financial Conduct Authority – FCA has been established.
The FPC, which has the ultimate responsibility for macroprudential policies, has authority over the PRA and FCA as well. Within this framework, the FPC not only has the power to recommend these two authorities, but it can also instruct the supervisory authorities to carry out the necessary arrangements. Moreover, the FPC can recommend all authorities and institutions concerned besides these two authorities and can warn the public about issues concerning financial stability when it deems necessary.
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European Union (EU)
The new supervisory structure in Europe was initiated by the “Larosiére High Level Group Report” in February 2009; and the resolution on new financial structure, which was adopted by the European Parliament on September 22, 2010, was promulgated in the Official Journal of the European Union on December 15, 2010. Thus, the European Systemic Risk Board (ESRB) and the European System of Financial Supervisors (ESFS) were officially established on January 1, 2011.
The ESRB shall asses systemic risks to financial stability as a whole, issue early warnings pertaining to these systemic risks and recommend enforcements when necessary. A new body called the European Systemic Risk Board (ESRB) has been set up under the auspices of the ECB, but totally independent from the ECB, to monitor macro risks and as a platform for concerned parties to voice their demands. Moreover, as the ESRB comprises heads of the European supervisory authorities responsible for micro policies, it was planned to ensure harmonization of micro and macro policies. The objective of the new structure is to be able to identify macro risks within the complex and interdependent structure of the financial system and to supervise the financial institutions in Europe under a comprehensive and common structure.
The ESRB is legally responsible for identifying and evaluating any systemic risk in the financial system within the EU. The ESRB can demand data from any authorities or institutions for the sake of monitoring systemic risk. When such systemic risks are deemed important, the ESRB issues warnings for the concerned authorities and institutions and can share them with the public if necessary. The ESRB also issues recommendations for remedial action in response to the risks identified and oversees how much of the remedial action recommended has been carried out. The newly established coordination with other European supervisory authorities brought about by the system is expected to introduce a new method that will put systemic risk measurement on a more methodological track and a risk dashboard will be introduced.
With the Regulation adopted by the European Parliament on September 22, 2010 and took effect as of January 1, 2011, the European system of financial supervision was restructured. Accordingly, the supervisory authority unions such as the Committee of European Banking Supervisors CEBS and the Committee of European Insurance and Occupational Pensions Supervisors CEIOPS composed of the supervisory authorities of the EU countries, have been legally accepted as the European supervisory authorities and restructured. While ESFS is charged with the oversight of financial institutions, the three supervisory authorities to be established – the European Banking Authority – EBA, the European Insurance and Occupational Pensions Authority EIOPA, and the European Securities and Markets Authority ESMA will be collaborating with the European Supervisory Authority – ESAs and interconnect the national financial supervisory authorities.
Besides these authorities, a common platform for all three authorities, the Joint Committee of the European Supervisory Authorities has been set up to facilitate broader cooperation between them. The Joint Committee has committed itself to carry out the tasks listed below:
• To draw up special rules for national authorities and financial institutions,
• To develop technical standards, guidelines and recommendations,
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• To monitor how rules are being enforced by national supervisory authorities,
• To take action in emergencies, including the banning of certain products,
• To mediate and settle disputes between national supervisors.
The European Supervisory Authorities, established within the framework of the new structure, will be working in close relation with the national authorities and help to mitigate the discrepancies between countries on regulatory and supervisory issues.
Malaysia
The Central Bank of Malaysia Act of 2009 vests very broad powers to the Bank regarding financial stability and macroprudential policies. The Bank has the power to request any kind of data or information regarding financial stability from the government or from regulatory/supervisory authorities or any institutions that it deems necessary.
“The Financial Stability Executive Committee”, which is established within the Bank, may consider, accept or reject the proposal (regarding issues such as liquidity assistance, subsidiaries or branches, shares or other capital instruments, assets and liabilities etc.) in respect of a real person or financial institution at the meeting. The Bank is obliged to act in line with the Committee’s decision.
The Central Bank of Malaysia is responsible for the prudent regulation of the financial authorities that it is responsible for. Whether or not they are included within the scope of the Bank’s supervision/oversight limits, the Bank is authorized to collaborate with and coordinate national and international authorities in the face of risks threatening financial stability and take or have authorities take the necessary measures to restore financial stability with a macro point of view. The Central Bank Act authorizes the Bank to take the necessary measures against risks that could jeopardize financial stability and undertake macroprudential oversight.
Moreover, the Bank can cooperate and make agreements with other supervisory authorities and can recommend them for the sake of financial stability.
Indonesia
The Financial System Stability Forum (FSSF) is a venue for coordination, cooperation and information exchange among the authorities responsible for safeguarding financial system stability in Indonesia. The FSSF, which was established on 30 December 2005 with a Joint Decree of the Minister of Finance, the Governor of Bank Indonesia (BI) and Chair of the Board of Commissioners of the Indonesia Deposit Insurance Corporation, has a crucial role, particularly in addressing systemic risk that can only be resolved through joint policies and decisions followed by coordinated and effective actions.
The three key functions of the FSSF are:
1. To discuss the various issues in the financial system with potential systemic impact, as advised by the financial institution supervisory authority;
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2. To coordinate and exchange information for the synchronization of laws and regulations concerning the banking system, non bank financial institutions and the capital markets; 3. To coordinate the implementation or preparation of specific initiatives in the financial sector.
Mexico
The Council of Stability of the Financial System was established in July 2010 with a Presidential decree. The aim of the Council is to create a formal avenue to boost coordination and information exchange between the financial authorities and to enable quick and accurate identification of risks to the financial system. The Council is chaired by the Minister of Finance and comprises the Bank of Mexico, the Secretary of Finance and Public Credit, the National Banking and Shares Commission, the National Commission of Insurance and Finance, the National Commission for the Retirement Savings System and the Institute for the Protection of Bank Savings. While decisions are expected to be taken by consensus, in the event of policy disagreements within the Council, a majority vote would resolve the controversies. Although each financial authority is responsible for the implementation of the policies comprised within the scope of its legal mandate, in case of disagreement with the Council, it cannot be forced into action if that would conflict with the institution’s own mandate. As part of the communication strategy, the council issues an annual report on the state of financial system and its activities.
Belgium
The supervisory framework of Belgium was changed on July 2010 and a two pillar model which the supervision of financial system has been conducted separately by the National Bank of Belgium and the Financial Services and Markets Authority FSMA was established.
In this new model, the National Bank of Belgium is responsible for safeguarding macro and micro stability, while the FSMA is responsible for ensuring that market operations are carried out impartially and transparently and market players treat their customers in a fair, honest and professional manner.
Within the framework of the new institutional framework, compliance with the prudential rules and codes of conduct are supervised separately and micro and macroprudential supervision are integrated thoroughly. The Central Bank, which currently monitors macroeconomic developments, is responsible for the risk based supervision of authorities within the financial system, while the FSMA is responsible for conduct of business regulations, supervision of financial markets and financial products and education of financial players.
Other Countries
An analysis of institutional frameworks in other countries reveals that there are mainly four structures. In the “Institutional Approach”, of which China, Mexico and Hong Kong are examples, the legal status of the firm (bank, insurance company, etc.) and the type of commercial activity it is engaged determine the authority that will supervise the firm. In the “Functional Approach”, for which France, Italy and Spain can be presented as examples, the type of commercial activity of the firm is important and there is a separate regulatory authority for each type of commercial activity. In the
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“Integrated Approach”, for which Germany is an example, the risk based supervision and conduct of business regulation for all financial services are carried out by a single authority. Lastly, in the “Twin Peaks Approach”, for which Australia, Canada and Holland can be presented as examples, there are at least two regulatory authorities focusing on risk based supervision and conduct of business regulation.
It was understood that the micro approach, which focused on individual situations of financial institutions and ignored cross sectoral relations, fell short of meeting the needs alone and macroprudential policies have come to the fore; and it has become accepted worldwide that authorities should act more proactively in the face of risks. In this context, the macroprudential policy framework should be handled with care, taking into account both the institutional structure and policy implementations. It should be borne in mind that macroprudential policies shall not be designed to replace macroeconomic policies, but to complement them.
References
International Monetary Fund (IMF), Macroprudential Policy – An Organizing Framework, IMF Policy Paper, March 2011 National Treasury Policy Document, Republic of South Africa “A Safer Financial Sector to Serve South Africa Better”, February 2011 Websites of central banks mentioned
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V.9. The Impact of Global Liquidity Ratios on Central Bank Operations
I. Global Liquidity Ratios
With the lessons learned from the global financial crisis, the Basel Committee developed global liquidity ratios for banks and issued a document titled the International Framework for Liquidity Risk Measurement, Standards and Monitoring 19 in December 2010. The objective of the ratios introduced in the document is to reinforce the harmonization and resilience of liquidity risk supervision on a global scale. Two global liquidity ratios have been developed.
A. Liquidity Coverage Ratio-LCR
According to the first ratio the Liquidity Coverage Ratio , banks are required to maintain unencumbered, high quality liquid assets to meet their liquidity needs for a 30 day time horizon under an acute liquidity stress scenario. Accordingly, the ratio of stock of high quality liquid assets to net cash outflows over a 30 day time period shall be 100 percent or greater.
Stock of high quality liquid assets ≥ %100 Total net cash outflows over the next 30 calendar days
The numerator of the ratio is calculated by multiplying the value of assets defined as liquid assets by certain haircuts. Basically, liquid assets are comprised of cash, central bank reserves, marketable high quality securities representing claims on or claims guaranteed by sovereigns, central banks, non central government public sector entities, high quality non financial corporate bonds and covered bonds.
In the denominator, cash inflows stemming from on balance sheet and off balance sheet transactions due in 30 days are multiplied by certain factors while cash outflows stemming from on balance sheet and off balance sheet transactions due in 30 days are multiplied by run off factors. Net cash outflows are calculated by subtracting the sum achieved by multiplying cash inflows by the factors, from the amount achieved by multiplying cash outflows by the run off factors.
B. Net Stable Funding Ratio-NSFR
Besides the liquidity coverage ratio, a second ratio, the NSFR, has been developed to limit structural liquidity mismatches and keep core funding above a certain level. According to this ratio, a bank’s available amount of stable funding to the required amount of stable funding shall be greater than 100 percent.
Available amount of stable funding > %100 Required amount of stable funding
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Available stable funding (ASF) is defined as the total amount of a bank’s capital; preferred stock with maturity of equal to or greater than one year, liabilities with effective maturities of one year or greater; a certain portion of non maturity retail deposits and retail deposits with residual maturities of less than one year and a certain portion of non maturity wholesale funding and wholesale funds with residual maturities of less than one year provided by non financial corporate customers, sovereigns, central banks, public sector entities and multilateral development banks.
The required amount of stable funding is calculated by classifying assets from the most liquid to the least liquid and multiplying them by certain factors. For example, while the value of government bonds are multiplied by 5 percent factor the value of fixed assets are multiplied by 100 percent factor. Therefore, less funding is required for government bonds while more funding is required for fixed assets. While calculating the Required Amount of Stable Funding, the required amount of stable funding that could arise from off balance sheet transactions is also included in the total amount.
The Committee decided that informative reporting for the LCR and NSFR shall be started by January 1, 2012 and LCR and NSFR will be introduced as minimum standards as of January 1, 2015 and January 1, 2018, respectively.
II. Liquidity Ratios Implemented in Turkey
In Turkey, the “Regulation on Measurement and Evaluation of Liquidity Adequacy of Banks” took effect in June 2007. As per the Regulation, banks are subject to Total Liquidity Adequacy Ratios and Foreign Currency Liquidity Adequacy Ratios. Ratios are calculated for one week and one month maturity brackets. According to the one week maturity bracket ratio, the weekly arithmetic average of the ratio of the sum of assets taken as stock irrespective of maturity and cash inflows due in one week to the sum of liabilities taken as stock irrespective of maturity and cash outflows due in one week calculated for each working day shall not be smaller than 100 percent. The weekly arithmetic average of the FX liquidity ratio, which is calculated in the same manner, shall not be smaller than 80 percent.
Assets taken as stock irrespective of maturity + Cash inflows due in one week ≥ %100
Liabilities taken as stock irrespective of maturity + Cash outflows due in one week
FX assets taken as stock irrespective of maturity + FX cash inflows due in one week ≥ %80
FX liabilities taken as stock irrespective of maturity + FX cash outflows due in one week
According to the one month maturity bracket liquidity ratio, the ratio of the sum of assets taken as stock irrespective of maturity and cash inflows due in one month to the sum of liabilities taken as stock irrespective of maturity and cash outflows due in one month shall not be smaller than 100 percent and the FX liquidity ratio calculated by using the same method shall not be smaller than 80 percent.
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Assets taken as stock irrespective of maturity + Cash inflows due in one month ≥ %100
Liabilities taken as stock irrespective of maturity + Cash outflows due in one month
FX assets taken as stock irrespective of maturity + FX cash inflows due in one month ≥ %80
FX liabilities taken as stock irrespective of maturity + FX cash outflows due in one month
For both maturity brackets, the numerators of ratios are calculated by multiplying assets taken as stock irrespective of maturity and cash inflows by certain factors while denominators are calculated by multiplying liabilities taken as stock irrespective of maturity and cash outflows by certain run off factors.
With an amendment 20 to the "Regulation on Measurement and Evaluation of Liquidity Adequacy of Banks" in December 2009, a new liquidity ratio that banks are obliged to meet called "liquidity adequacy ratio for assets and liabilities calculated over stock values" was introduced. Basically, this ratio is the ratio of the sum of banks' most liquid assets to the sum of deposits, due to banks and the CBRT and loans extended to the bank excluding subordinated loans and the arithmetic average of this ratio during the 14 day period covering (matching) the period of establishment of required reserves, shall not be smaller than 7 percent.
When liquidity ratios in Turkey are compared to global ones, it is observed that basically, the LCR is very much alike the weekly and monthly liquidity ratios in Turkey and we do not have a liquidity ratio similar to the NSFR. Moreover, the compulsory FX liquidity ratios in Turkey are only presented as a monitoring ratio in the “International Framework for Liquidity Risk Measurement, Standards and Monitoring”.
III. The Prospective Impacts of Global Liquidity Ratios on Central Bank Operations
As our banks are already subject to national liquidity ratios, it is expected that they will not have too much difficulty in adapting to the LCR. Although, a ratio similar to the NSFR does not exist in Turkey, taking into account the fact that Turkish banks are basically engaged in retail banking and have strong capital structures, they are not expected to have much difficulty meeting the NSFR. Meanwhile, as the direction and intensity of the impact of global liquidity ratios on central bank operations will vary according to the country, structure of financial markets and the central bank’s policy framework, the impacts of global liquidity ratios on operations of central banks generally and of The Central Bank of Turkey specifically, are discussed below.
A. Impact on Banks’ Reserves at Central Banks
According to the LCR, central bank reserves, to the extent that they can be drawn down in times of stress, are also included in banks’ liquid assets. This could encourage banks obliged to meet
20 Published in the Official Gazette no. 26333 dated November 1, 2006. ______Financial Stability Report – May 2011 84
TÜRKİYE CUMHURİYET MERKEZ BANKASI liquidity ratios to maintain more reserves at central banks. The severity of this tendency would depend on how binding the liquidity regulations are the opportunity cost of maintaining reserves at the central bank and the availability of assets that could be used as collateral.
In the liquidity ratios implemented in Turkey, while the banks’ free non maturity deposits at the CBRT are listed among assets taken as stock irrespective of maturity, their free time deposits are taken into account according to days to maturity. Moreover, 30 percent of the blocked amount of required reserves is listed among assets taken as stock irrespective of maturity. The LCR makes no distinction between non maturity and time deposits regarding central bank reserves and banks’ reserves at the central bank are eligible as high quality liquid assets to the extent that they can be drawn down in times of liquidity stress. Thus, should the LCR be implemented in Turkey, the portion of banks’ reserves at the central bank that will be taken into account in this ratio will have to be decided by the CBRT and BRSA (Banking Regulation and Supervision Agency).
No significant change is expected to occur in the Turkish banks’ tendency to maintain reserves at the Central Bank of Turkey. According to the current liquidity regulation in Turkey, the free non maturity account is already accepted as a liquid asset; therefore LCR implementation is not expected to stimulate a rise in this item. Although the total amount of free time accounts of banks at the CBRT is currently very low, this amount could increase if the CBRT holds time deposit buying auctions.
B. Impact on the Quality of Collateral that Banks Pledge at the Central Bank
With a global point of view, it is observed that for their operations, some central banks accept a broader set of assets than is listed in the high quality liquid assets definition in the LCR. For instance, corporate bonds with low credit ratings or some loans can be accepted as collateral. When the LCR starts to be implemented, banks might start using in their transactions with central banks assets that are not listed among high quality liquid assets in the LCR but accepted by central banks as collateral. Thus, a bigger portion of liquid assets will be unencumbered and meeting the LCR will become easier. This may in return push up credit and liquidity risk in central bank balance sheets depending on the content of the set of assets that the central bank accepts as collateral. In LCR, the run off rate for secured funding transactions backed by assets that are not eligible for the stock of highly liquid assets is 100 percent. However, if the counterparty to this transaction is a domestic sovereign, domestic central bank or domestic public sector entity than the run off rate falls down to 25 percent. For instance, in a repo transaction if a bank pledges as collateral an asset that is not listed among the high quality liquid assets in the LCR and if the counterparty is a bank, zero percent of the repo is assumed to roll over on the due date; however if the counterparty is a central bank, then 75 percent of the repo is assumed to roll over. This approach in the LCR is also expected to enhance the banks’ tendency to pledge assets that are not listed among high quality liquid assets in the LCR in their transactions with the central bank.
In their transactions at the Interbank Money Market within the CBRT and Open Market Operations, banks can pledge as collateral FX deposits, banknote deposit accounts that they have opened at the CBRT’s Ankara and/or İstanbul branches, bills and bonds issued by foreign governments and treasuries the maturity structures and peculiarities of which are accepted by the
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Central Bank, Central Bank liquidity bills, GDDSs (TL, FX and FX indexed) and Eurobonds issued by the Treasury. Moreover, currently, open market operations except for the issue and early redemption of liquidity bills are carried out only against GDDS. As the assets accepted as collateral by the CBRT overlaps with those listed as high quality liquid assets in the LCR, there will be no deterioration in the quality of collateral that banks pledge at the CBRT after the introduction of the LCR in Turkey and therefore no risk will be borne by the CBRT.
C. Impact on Banks’ Long-term Funding Demand
It is expected that banks in some countries will be inclined to extend the maturity of wholesale funds when the LCR starts to be implemented. In tandem with this, banks may try to extend maturity of central bank funding and thus raise borrowing interest rates for long term funding facilities.
Currently, in Turkey, the CBRT funds the banking system via 1 week fixed rate repo auctions. As is known, the maturity of liquidity facilities provided to the banking system is determined by the CBRT in line with the monetary policy targets and as a component of the liquidity management strategy. Accordingly, implementation of the LCR in Turkey will not have consequences such as banks’ raising interest rates of long term funding facilities to be able to have access to longer term central bank funds. Meanwhile, as there is already a liquidity regulation similar to the LCR in Turkey, no significant rise is expected to occur in the banks’ demand for long term central bank funding after the LCR takes effect.
D. Impact on Banks’ Demand for Central Bank Funds
The NSFR gives priority to retail funding rather than wholesale funding. In the NFSR, the available stable funding factor of retail funds is higher than that of wholesale funds. This could lead to competition between banks to collect deposits that could in turn induce volatility in deposits that were relatively more stable prior to the competition. In return, this could end up in a rise in banks’ demand for central bank funding facilities for their liquidity needs stemming from a run on deposits.
Retail deposits constitute an important component of Turkish banks’ funds and banks are primarily engaged in retail banking. Although they have short maturities, deposits are generally rolled over and therefore they do not pose a major liquidity risk for the banks and are regarded as stable funding. Therefore, the NFSR’s approach to changing business models in favor of retail banking is not expected to significantly impact the volatility of deposits in the Turkish banking system that is highly engaged in retail banking and induce a significant rise in the demand for central bank funds to cover the liquidity shortage stemming from volatility in deposits.
E. Impact on the Banks’ FX Liquidity
As stated in part II, the LCR is not expected to be met for each currency. While the LCR will be met in a single common currency, in order to prevent major liquidity shortages in significant currencies, the LCR by significant currencies is envisaged as a monitoring ratio in the global liquidity standards document. However the monitoring ratio does not have a minimum and it is stated in the document that the supervisory authorities can set minimum monitoring ratios according to the convertibility of currencies.
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Currently, FX liquidity ratios are implemented in Turkey. When global liquidity ratios are implemented, FX liquidity ratios will no longer be obligatory for banks in Turkey and minimum monitoring ratios may be determined for foreign exchange liquidity at the supervisory authorities’ discretion. Taking into account the fact that FX transactions of Turkish banks are currently sizeable, removing the FX liquidity ratio obligation could cause banks to act imprudently in FX liquidity management despite the existence of an observation ratio. However, the FX liquidity ratio might remain compulsory at national discretion.
In global liquidity ratios, the high quality liquid asset definition is based on the credit rating of the asset. If the government debt securities which are issued by countries other than the country that the bank assumes risk or the bank’s home country, corporate bonds or covered bonds, have high credit ratings, they are listed among high quality liquid assets and otherwise they are not accepted as high quality liquid assets.
As the credit ratings of developing countries are generally lower than those of developed countries, it might be that the above mentioned case will lead to a decline in the demand for government securities of developing countries like Turkey. Meanwhile, if international banks reduce credits to be able to meet liquidity ratios, there could be a decline in external funding facilities for Turkish banks that in turn could lead to funding problems in Turkish banks. Decline in both demand for government debt securities and external funding facilities may affect the amount of capital flows to Turkey.
F. Impact on Central Banks’ Monetary Policy Transmission Mechanisms
Global liquidity ratios are expected to encourage banks to extend their funding maturities and at the same time shorten the maturities of their assets. This could end up in a rise in the cost of long term funds compared to short term funds, which would drive the Money market yield curve steeper and lead to a general rise in the cost of funding in the economy. Moreover, a change in the slope of the yield curve might be interpreted by the central banks as a change in the banks’ inflation and monetary policy expectations and thus affect the direction of monetary policy.
In Turkey, there is already a liquidity regulation similar to the LCR, therefore, no significant change is expected to occur in the cost of short and long term funds and the yield curve is not expected to get steeper after the LCR is put into practice.
Global liquidity ratios encourage banks to allocate funds to more liquid assets compared to loans. This could lead to a decline in the credit portfolios of banks and reduce the effectiveness of the credit channel of central banks’ monetary policies in some countries.
In the current liquidity regulation of Turkey, a significant part of loans are not regarded as liquid assets. In Turkey, liquidity ratios were put into practice in June 2007 and an analysis of the post June 2007 period reveals that the share of credits on the balance sheet has not decreased but increased. In Turkey, banks’ assets are mostly composed of government debt securities and credits. Government debt securities are listed among liquid assets. Banks determine their credit portfolios according to their profit targets, risk appetite and availability of external funding. After the liquidity ratios started to be implemented in Turkey, credits displayed a rise as the banks already had adequate
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liquid assets and extending loans in the mentioned period was profitable for them. As we already have a similar liquidity regulation, the impact of global liquidity ratios on Turkish banks’ credits and liquid assets is expected to be limited. Meanwhile, should the public borrowing requirement decrease in the upcoming period, banks would in turn have to decrease the government debt securities in their portfolios and the impact of the LCR on the credit channel would be more pronounced.
IV. Conclusion
In the upcoming period, global liquidity ratios will be reviewed with respect to various aspects and some changes can be made in the ratios at the end of this process. To reiterate once more, global liquidity ratios, as they are, are not expected to make a significant impact on CBRT operations as Turkish banks are already subject to national liquidity ratios and due to the monetary policy implementation of the CBRT. Still, the prospective impact of global liquidity ratios on Turkish banks’ FX liquidity should be closely monitored.
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V.10 Central Counterparties (CCPs)
A central counterparty can be defined as a financial institution guaranteeing the clearance of financial instruments traded in one or more than one market by assuming the role of a buyer against a seller and a seller against a buyer. Thus, in a clearing operation, which is the final stage of selling or buying transactions, the other counterparty of a seller or buyer is the central counterparty.
The reason why the central counterparty concept first developed in the derivatives market is that the counterparty risk in these markets is higher than that in spot markets and moreover, counterparty risk management is harder to achieve in derivatives markets due to the long clearing process. While transactions in spot markets are concluded in a few days, transactions in derivatives markets are concluded in a period stipulated in the contract.
The importance of central counterparties with a financial infrastructure has increased recently. One of the heated issues debated during the last financial crisis was the structure and functioning of over the counter (OTC) derivatives markets. The adversities witnessed in housing loans after the last crisis that first started in the housing market in the USA not only distressed those with credit debts but also the banks that had extended these loans, the investors that had purchased the securitized housing loans as well as the insurance companies that insured these products. Especially the non transparent structure of over the counter (OTC) markets has drawn attention and necessitated a re arrangement of over the counter (OTC) markets.
International regulatory authorities such as the FSA, the IOSCO and the BIS concluded that the systemic risk in over the counter (OTC) markets could be taken under control via central counterparties and central counterparties could be used as an intermediary for managing the risk in over the counter (OTC) markets and achieving transparency in markets. In the leaders’ statement issued following the G 20 Summit in Pittsburgh in September 2009, it was stated that “All standardized over the counter derivative contracts should be traded in exchanges or electronic trading platforms, where appropriate, and cleared by the central counterparties by end 2012 at the latest”.
The joint guide of the IOSCO and CPSS on the recommendations on principles regarding the clearing of counterparties has been revised to be implemented in the over the counter (OTC) derivatives market. The Report outlines 11 recommendations to be applied to central counterparties in over the counter (OTC) derivatives markets. These recommendations are as follows:
1. Legal risk, 2. Participation requirements, 3. Measurement and management of credit exposures, 4. Margin Requirements, 5. Financial resources, 6. Default procedures, 7. Operational risk, 8. Efficiency, 9. Governance,
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10. Transparency, 11. Regulation and Oversight.
The recommendations basically provide guidance for achieving strong financial structures for central counterparties and monitoring any prospective risks stemming from positions of participants by employing several control mechanisms. The relation between central banks and central counterparties constitute an important agenda item of international institutions.
I. Central Counterparties’ Access to Central Bank Resources/Funding Facilities
After the global financial crisis in 2008, over the counter (OTC) derivatives markets, which were identified as a systemic risk factor, were decided to be re regulated and at the Pittsburg Summit, the G 20 leaders decided that these markets should be reorganized. The challenge of keeping records of over the counter (OTC) derivatives products and managing the counterparty risk necessitated a review of the state of counterparties. Debates are still going on about the access to central bank funding facilities by central counterparties, which is regarded as a source of systemic risk.
Central counterparties are identified as systemically important payment institutions among financial market infrastructures (FMIs). Systemically important FMIs run by central banks or the corporate sector are security settlement systems or large value payment systems. Central Bank services provided for central counterparties that are listed among FMIs run by the corporate sector are payments and settlements accounts, collateral management systems, intraday and overnight liquidity facilities and emergency liquidity facilities. Although central banks provide various liquidity facilities for FMIs such as central counterparties; these facilities are not standard central bank policies.
The effective and uninterrupted operation of payments systems and the reduction of settlement risk are listed among a central bank’s priority duties. Thus, with respect to achieving financial stability, while access to payment accounts lowers the risk of settlement bank risk, access to liquidity facilities lowers the counterparty risk by ensuring settlement of payments. The central counterparties are expected to meet their regular liquidity needs by using private sector instruments and resort to central bank facilities only under extraordinary conditions. Nonetheless, utilization of central bank facilities either at normal times or under extraordinary conditions would lead to moral hazard risk. In case of moral hazard, the central counterparties would tend to bear more risk.
The liquidity needs of central counterparties are different from those of other financial institutions and their liquidity needs may vary depending on the asset transaction type. Normally, the liquidity need of a central counterparty is limited to day time, however in case of an operational problem at the custodian bank or a bankruptcy of a participant, a major and permanent liquidity need may arise. For central counterparties operating in more than one country, in case of bankruptcy of a participant, liquidity shortage in more than one currency unit would arise.
Standards should be set for central counterparties’ access to liquidity and the provision of liquidity against collateral is being discussed. It is possible for central counterparties that bear certain risks to have direct or indirect access to liquidity. Nonetheless, the idea of accessibility to direct liquidity between central banks only in case of emergency has more supporters.
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A consensus has not yet been reached on the scope of the liquidity to be provided for the central counterparties, the method of oversight, cross border liquidity support and the policy impacts of such support. While providing liquidity support for central counterparties calls for a compromise between achieving financial stability and moral hazard, some novelties in standard monetary policies would become necessary once such supports started to be provided by central banks. Financial facilities to be provided for FMIs are crucial for achieving financial stability. Taking into account their systemic risk generation impacts of central counterparties, the liquidity support to be provided for these institutions could prevent crises and the worsening of an existing crisis. Nonetheless, the scope and operational framework of monetary policy as well as the moral hazard issue are hot debates with respect to the implementation of liquidity support.
References
CPSS, Central Bank Oversight of Payment and Settlement Systems, May 2005. CPSS IOSCO, Recommendations for Central Counterparties, November 2004. CPSS IOSCO, Guidance on the application of the 2004 CPSS IOSCO Recommendations for Central Counterparties to OTC derivatives CCPs Consultative Report, May 2010. Workshop on Capitalization of Bank Exposures to Central Counterparties, Basel, March 2011.
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LIST OF CHARTS
Chart I.1. Debt Stock and Budget Deficit in Some Countries 1
Chart I.2. CDS in PIIGS Countries 1
Chart I.3. Net Receivables of International Banks from Certain Countries 2
Chart I.4. Liquidity Provided by the ECB to Banks 2
Chart I.5. Debts of PIIGS Banks Maturing in 2011 12 2
Chart I.6. Policy Rates in Advanced Economies 3
Chart I.7. Balance Sheet Aggregates and Inflation Rates of Central Banks of Advanced Economies 3
Chart I.8. Bond Yields in Advanced Economies 3
Chart I.9. Asset Market Indicators 3
Chart I.10. Growth Rates in Advanced Economies 4
Chart I.11. Unemployment Rates in Advanced Economies 4
Chart I.12. Development of Credits in the US Banking Sector 4
Chart I.13. Development of Credits in the Euro Area Banking Sector 4
Chart I.14. Flow of Funds towards Emerging Economies 5
Chart I.15. Capital Flows Towards Emerging Economies by Type and REER 5
Chart I.16. Change in Policy Rates in Emerging Economies 6
Chart I.17. Change in Reserve Requirement Ratios in Emerging Economies and Their Level 6
Chart I.18. Credit Growth in Emerging Economies 6
Chart I.19. Current Account Balance and Official Reserve Changes in Emerging Economies 6
Chart I.20. Output Gap and Annual Credit Growth Rate in Emerging Economies 7
Chart I.21. Inflation Rates in Country Groups 7
Chart II.1. GDP and Its Components 10
Chart II.2. Industrial Production and Capacity Utilization 10
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Chart II.3. GDP and Its Trend 10
Chart II.4. Seasonally Adjusted Capacity Utilization Rate 10
Chart II.5. Seasonally Adjusted Unemployment Rate 11
Chart II.6. Inflation 11
Chart II.7. Foreign Trade Balance 11
Chart II.8. Current Account Balance 11
Chart II.9. Financing Structure of the Current Account Deficit 12
Chart II.10. Development of Credit Growth and Current Account Deficit 13
Chart II.11. Credit Volatility and Average Credit Growth Rate by Countries 13
Chart II.12. Reserve Requirement Ratios 13
Chart II.13. CBRT Interest Rates 14
Chart II.14. Overnight Interest Rates 14
Chart II.15. Weighted Average Maturity of TL Deposits and FX Deposit Accounts 14
Chart II.16. Savings Deposits Yield Curve 14
Chart II.17. Primary Budget Balance 15
Chart II.18. Budget Balance 15
Chart II.19. Central Government Debt Stock 16
Chart II.20. Composition of Domestic Debt Stock 16
Chart II.21. Treasury Discounted Auction Interest Rate 16
Chart II.22. Eurobond Interest Rates 16
Chart II.23. Financial Debt of Corporate Sector 17
Chart II.24. Composition of Financial Debt 17
Chart II.25. Non Bank Sector Net FX Borrowing 18
Chart II.26. Non Bank Sector External Debt Rollover Ratio 18
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Chart II.27. Sales and Profitability of Firms by March 2011 18
Chart II.28. Foreign Exchange Position of the Corporate Sector 19
Chart II.29. FX Assets to FX Liabilities of the Corporate Sector 19
Chart II.30. Household Liabilities 19
Chart II.31. Decomposition of Household Liabilities 20
Chart II.32. Credit Card Balances of Deposit Banks and Balances that Incur Interest Charge 20
Chart II.33 Expenditures by Bank and Credit Cards and Consumption of Resident Households 21
Chart II.34. FX Indexed Consumer Loans and FX Indexed Housing Loans 21
Chart II.35. Household Financial Assets and Liabilities 21
Chart II.36. Ratio of Household TL Investment Instruments to FX Investment Instruments 22
Chart III.1. Balance Sheet Size of the Financial Sector 25
Chart III.2. Development of the Banking Sector 25
Chart III.3. Loans and Deposit Growth / GDP 26
Chart III.4. Capital Inflow and Loans 26
Chart III.5. Credit Developments 27
Chart III.6. Credit Standards and Credit Demand in the Euro Area 27
Chart III.7. Credit Developments 27
Chart III.8. Real Increase in Credits by Type and Their Contribution to Growth 27
Chart III.9. Credit Developments in the First Quarter 28
Chart III.10. Bank Loans’ Tendency Survey 29
Chart III.11. Interest Rates on Consumer Loans 29
Chart III.12. Interest Rates on Deposits and Corporate Loans 29
Chart III.13. Distribution of Total Loans 30
Chart III.14. Distribution of Consumer Loans 30
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Chart III.15. Currency and Maturity Composition of Loans 31
Chart III.16. FX Loans 31
Chart III.17. Loans and Securities 31
Chart III.18. Funds Obtained from Deposits, Repo Transactions and Due to Banks 31
Chart III.19. Loan / Deposit and Foreign Liabilities 32
Chart III.20. Deposit and Foreign Liabilities 32
Chart III.21. Composition of Foreign Liabilities 32
Chart III.22. Distribution of Foreign Liabilities and Average Maturities 32
Chart III.23 Fund Liquidity and Market Liquidity Index 33
Chart III.24 Non core Funding Resources 33
Chart III.25. Liquid Assets 34
Chart III.26. Total Liquidity Adequacy Ratio 34
Chart III.27 Results of the Stress Test 34
Chart III.28. Foreign Currency Liquidity Adequacy Ratio 35
Chart III.29. Foreign Currency Position 35
Chart III.30 Non Performing Loans 37
Chart III.31 Ratio of NPLs and Net NPL / Own Funds of Selected Countries 37
Chart III.32 Return on Equity and Risk Free Interest Rate 38
Chart III.33 Return on Assets and Net Interest Margin 38
Chart III.34. Return on Equity and Return on Assets of Selected Countries 38
Chart III.35 Capital Adequacy Ratio 39
Chart III.36 Ratio of Own Funds to Total Assets 39
Chart III.37 Capital Adequacy Ratios for Selected Countries 39
Chart III.38 Ratio of Own Funds to Total Assets for Selected Countries 39
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Chart III.39. Composition of Total Risk Exposure 40
Chart III.40. Developments in Free Capital 40
Chart III.41 Results of Scenario Analysis 40
Chart III.42. Financial Strength Index 41
Chart III.43. Banking Sector Stability Map 41
Chart IV.1. Number and Amount of the Annual Transactions in the TIC RTGS System 44
Chart IV.2. Number and Amount of the Annual DvP Transactions in the TIC ESTS System 44
Chart IV.3. Concentration of Payments by Hours and Value of Transactions in the TIC RTGS System 44
Chart IV.4. Concentration Ratio in the TIC RTGS System 46
Chart IV.5. Accessibility Ratio within the TIC RTGS ESTS System 46
Chart IV.6. Volume and Value of Cheques Transacted in ICH 48
Chart IV. 7. Settlement Hours of the Cheque Clearance System – 2010 50
Chart IV.8. Number of Debit Cards and Credit Cards 50
Chart IV.9. Number of ATM POS 50
Chart IV.10. Volume and Value of Credit Card Transactions 51
Chart IV.11. Volume and Value of Debit Card Transactions 51
Chart IV.12. Volume and Value of Credit Cards Processed in the Card Clearing System 51
Chart IV.13. Volume and Value of Debit Cards Processed in the Card Clearing System 51
Chart IV.14. Ratio of Value of Credit Card Transactions Subject to Clearing Process to Total Value of Credit Card Transactions 52
Chart IV.15. ISE Stock Markets Transaction Value 53
Chart IV.16. ISE Bonds and Bill Markets Transaction Value 53
Chart V.1.1. Real Credit Growth Rate of Some Advanced Economies 55
Chart V.1.2. Real Credit Growth Rate of Some Emerging Economies 55
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Chart V.1.3. Loan/GDP Ratio of Some Advanced Economies 56
Chart V.1.4. Loan/GDP Ratio of Some Emerging Economies 56
Chart V.1.5. Variance of Real Credit Growth Rate of Some Advanced Economies 56
Chart V.1.6. Variance of Real Credit Growth Rate of Some Emerging Economies 56
Chart V.2.1. Scenario Outputs for the Banking Sector CAR, NPL Ratio and Loan Growth 60
Chart V.3.1. Non core Funding Resources 62
Chart V.3.2. Non core Funding Resources 62
Chart V.5.1. The Number and Amount of Sukuk Issued 68
Chart V.5.2. Currency Unit of the Sukuk Issued 68
Chart V.5.3. Growth of Assets, Loans and Deposits of Participation Banks 69
Chart V.5.4. Growth in the Number of Branches and Staff of Participation Banks 69
Chart V.6.1. Breakdown of Turkish lira Deposits/Participation Accounts by Maturities 71
Chart V.6.2. Breakdown of FX Deposits/Participation Accounts by Maturities 71
Chart V.6.3. Weighted Average Maturity of Turkish lira Deposits/Participation Accounts 72
Chart V.6.4. Weighted Average Maturity of FX Deposits/Participation Accounts 72
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LIST OF TABLES
Table I.1. PIIGS Countries Receiving Fiscal Stimulus 2
Table II.1. Return on Equity and Its Components 18
Table II.2. Ratio of Household Disposable Income, Liabilities and Interest Payments 19
Table II.3. Number of Credit Card and Consumer Loan Defaulters 21
Table II.4. Composition of Household Financial Assets 22
Table III.1. Assumptions 34
Table III.2. NPL Ratio 37
Table III.3. Scenarios Applied 40
Table IV.1. Real Time Gross Settlement System (RTGS) Country Comparison 45
Table IV.2. Number and Value of Transactions and Daily Averages within the TIC RTGS System 46
Table IV.3. Distribution of the Number of Cheques Subject to Clearing According to Tranches 49
Table IV.4. Cheque Clearance System Netting Ratio 49
Table IV.5. Card Clearance and Settlement System / Netting Ratio 52
Table IV.6. Netting Ratio regarding the Clearance of the Securities Traded at the ISE 54
Table IV.7. Information on the accounts of the Members of TURKDEX at Takasbank 54
Table V.2.1. Variables Used in Satellite Models 58
Table V.3.1. Classification of Core and Non Core Balance Sheet Liabilities 61
Table V.7.1. Developments Regarding Bill and Bond Issues of Deposit Banks 74
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LIST OF BOXES
Box III.1. Liquidity Measures taken by the Central Bank of Turkey 35
Box IV.1. Developments in IBAN Application 47
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ABBREVIATIONS
ACMIIT : The Association of Capital Market Intermediary Institutions of Turkey
AIRCT : The Association of the Insurance and Reinsurance Companies of Turkey
ASF : Available Stable Fund
ATM : Automated Teller Machines
BB : Bundesbank
BDF : Banque de France
BE : Belgium
BIS : Bank for International Settlements
BoE : Bank of England
BoJ : Bank of Japan
BRSA : Banking Regulation and Supervision Agency
CAR : Capital Adequacy Ratio
CBRT : Central Bank of the Republic of Turkey
CCPs : Central Counterparties
CCS : Cross Currency Swap
CDS : Credit Default Swap
CEBS : Committee of European Banking Supervisors
CEIOPS : Committee of European Insurance and Occupational Pensions Supervisors
CMB : Capital Markets Board
CPI : Consumer Price Index
CPSS : Committee for Payment and Settlement Systems
CRA : Central Registry Agency
DvP : Delivery versus Payment
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EA : Euro Area
EAD : Exposure at Default
EBA : European Banking Authority
ECB : European Central Bank
EFSF : European Stability Fund
EFSM : European Financial Stability Mechanism
EFT : Electronic Fund Transfer System
EIOPA : European Insurance and Occupational Pensions Authority
EL : Expected Loan Loss
ESAs : European Supervisory Authority
ESFS : European System of Financial Supervisors
ESMA : European Securities and Markets Authority
ESRB : European Systemic Risk Board
ESTS : Electronic Securities Transfer and Settlement System
EU : European Union
FCA : Financial Conduct Authority
FDIC : Federal Deposit Insurance Corporation
Fed : Federal Reserve System
FMI : Financial Market Infrastructures
FPC : Financial Policy Committee
FSA : Financial Services Authority
FSAP : Financial Sector Assessment Program
FSB : Financial Stability Board
FSMA : Financial Services and Markets Authority
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FSOC : Financial Stability Oversight Committee
FSI : Financial Strength Index
FSSF : Financial System Stability Forum
FX : Foreign Exchange
GDDS : Government Domestic Debt Securities
GDP : Gross Domestic Product
GS : Goldman Sachs
IBAN : International Bank Account Number
ICC : Interbank Card Center
ICH : Interbank Clearing Houses Center
IFIS : Islamic Finance Information Service
IFS : IMF International Financial Statistics
IIF : International Finance Institute
IILM : International Islamic Liquidity Management Corporation
IOSCO : International Organization of Securities Commissions
IMF : International Monetary Fund
ISE : Istanbul Stock Exchange
LCR : Liquidity Coverage Ratio
LGD : Loss Given Default
M2 : Money Supply (2)
MENA : Middle East and North Africa
NL : Netherlands
NPL : Non performing Loans
NSFR : Net Stable Funding Ratio
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OCC : Office of the Comptroller of the Currency
OTC : Over the Counter (Markets)
PD : Probability of Default
PDP : Public Disclosure Platform
PIIGS : Portugal, Ireland, Italy, Greece and Spain
POS : Point of Sale Devices
PRA : Prudential Regulation Authority
RIB : Revenue indexed Bonds
RR : Reserve Requirements
RTGS : Real Time Gross Settlement
RWA : Risk Weighted Assets
SDIF : Savings Deposit Insurance Fund
SIC : Swiss Interbank Clearing
SME : Small and Medium Size Enterprise
SPO : State Planning Organization
TETS : ISE Settlement and Custody Bank Electronic Transfer System
TIC : Turkish Interbank Clearing
TKBB : The Participation Banks Association of Turkey
TL : Turkish Lira
TOKI : Housing Development Administration of Turkey
Turkdex: Turkish Derivatives Exchange
TurkStat: Turkish Statistical Institute
UK : United Kingdom
USA : United States of America
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USD : United States Dollars
VIX : Chicago Board Options Exchange Market Volatility Index
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