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2.3 Financial Stability Developments and Activities
On the back of the favorable global economic outlook, increased global risk appetite towards emerging economies, and the partial alleviation of uncertainties about monetary policies of advanced economies, developments in global financial markets in 2017 were supportive of global financial stability. The recovery in economic activity in the United States and other developed countries underpinned the favorable outlook in global financial markets while the search for yields helped keep the flow of capital into developing countries strong. Nonetheless, uncertainties over fiscal and trade policies to be implemented in the USA, high levels of global indebtedness, and geopolitical problems in Asia and the Middle East posed downside risks to global financial stability.
Household assets and liabilities in Turkey continued to grow in 2017 while the decline in the household leverage ratio (defined as household liabilities/assets) that began in 2013 also continued, albeit at a somewhat slower pace. At times of heightened geopolitical uncertainties and FX volatilities, FX borrowing remains a serious financial stability issue for developing countries. As per the regulations that are currently in effect in Turkey, households are not allowed to borrow in foreign currencies; neither (with the exception of mortgage loans) are they allowed to borrow at flexible interest rates. These regulations preclude households from carrying either exchange rate risk or interest rate risk. The slowdown in economic activity, which appeared in 2016 in the wake of a series of internal and external shocks, was reversed in 2017 with the efforts to re‑activate the credit channel via government measures and incentives. During this period, the ratio of real‑sector indebtedness to GDP remained unchanged as a result of exchange rate volatility and a heightened awareness of exchange rate risk resulted a significant decline in FX‑denominated borrowing and consequently, the real sector’s overall FX open position also remained flat. Moreover, the TL‑settled forward foreign exchange sale auctions that the CBRT initiated in the last quarter of 2017, are also expected to support the real sector’s exchange rate risk management in the period ahead.
Credit growth accelerated in both retail and commercial loans in 2017. Growth in retail lending continued nourished by changes in macroprudential policies and a variety of government incentives. Meanwhile, TL‑denominated commercial lending accelerated in the first half of the year fueled by such incentives as interest‑free credit support of the Small and Medium Enterprises Development Organization of Turkey (KOSGEB), the so‑called “Respite” loans with low interest rates extended by the Union of Chambers & Commodity Exchanges of Turkey (TOBB), and Treasury‑backed Credit Guarantee Fund loans. In the second half of the year, TL‑denominated commercial lending continued to grow albeit more slowly as the upper limit of the KGF loans was approached and lost momentum due to base effects. Non‑performing loan (NPL) ratios remained low owing to increases in economic activity, strong growth in Turkish lira lending, and positive developments in collections associated with regulations regarding loan‑restructuring. This is a confirmation of both the banking sector’s robust asset quality and of the real sector’s as well as households’ debt service capacity.
The sector’s profitability indicators displayed a favorable development owing to expanded credit volume and wider interest margins, effective cost and expense management, and the improvement in its asset quality. The industry’s capital adequacy ratios were boosted not only by greater profitability but also by growth in its Treasury-backed loans and its issuances of subordinated debt instruments.
In this period, rapid growth in credits was mostly financed by core liabilities and this in turn contributed positively to financial stability.
Banks’ use of external financing moderately increased in 2017, and sector’s liquidity buffers were deemed to be sufficient to survive adverse risk scenarios. Banks’ Liquidity Coverage Ratios, a measure enabling banks’ liquidity position to remain in the safe zone over a 30‑day time frame, were well above the legal lower limits while indicators showing their long‑term liquidity positions also remained within safe territory. These two factors increase the Turkish banking sector’s resilience to potential international market shocks. The maturities of Turkish banks’ non‑core funding items also remained long (thanks in part to reserve requirements) and this bolstered the sector’s ability to withstand a potential global liquidity crunch. The diversity in the countries and financial institutions from which Turkey’s banks borrow also supported this situation. Recently, the external debt roll‑over ratio is above 100 percent, banks can borrow syndication loans with maturities up to 2 years albeit at a limited amount, and there was a moderate recovery in costs in 2017. This is all evidence that there has been no noticeably unfavorable change in the credit supply of international lenders. The increasing need for Turkish lira liquidity generated by rapid growth in TL loans coupled with supportive market conditions encouraged banks to seek for alternative sources of funding. The result is that there has been an increase in banks’ Turkish‑lira borrowings in international swap markets and in their issues of long‑term bonds and subordinated debt instruments.
The risks associated with financial stability are discussed on various platforms in Turkey such as the Economic Coordination Council (ECC) and the Financial Stability Committee (FSC) and necessary measures are taken in a timely manner. CBRT continues to cooperate with and work in coordination with the authorities concerned. Central Bank representatives have participated in meetings of the FSC, the Systemic Risk Assessment Group set up within the FSC, and the sub-committee meetings of the Crisis Management & Resolution Standing Working Sub-Group, and the Systemic Risk Monitoring Standing Working Sub-Group (for which the CBRT serves as the secretariat).
One key financial stability issue that stood out in 2017 was the FX‑denominated indebtedness incurred by Turkey’s real sector. The CBRT played an active role in the project for which the foundations were laid at the FSC meetings. With an amendment to Article 44 of CBRT Law No.1211(1), CBRT was authorized to demand any and all manner of information and documents that will help it monitor transactions that affect the foreign currency positions of real persons and legal entities. The data monitoring system, which was set up at the CBRT to effectively manage company‑based exchange rate risks, is important in that it enhances the Bank’s ability to supervise companies’ currency risk in the long view.
In 2017, the CBRT also continued to support international publications and meetings in cooperation with other agencies and organizations. The CBRT’s relations with international agencies working in the field of financial stability such as the International Monetary Fund (IMF) and the Bank for International Settlements (BIS) continued as well. This relation takes the form of exchanging views on issues being dealt with in reports that the organizations intend to publish. The CBRT participates in the meetings organized by these agencies, but also it submits written opinions about reports published by them. The CBRT also undertakes work to establish cooperation between Turkish institutions when dealing with these matters in Turkey.
Throughout 2017, the CBRT continued to engage in efforts aimed at enhancing its representational influence and effectiveness on international financial platforms while also contributing to financial stability. The bank participated in the Plenary, the Steering Committee and standing committee meetings of the Financial Stability Board (FSB) at the highest level. The FSB promotes international financial stability; it does so by coordinating national financial authorities and international standard-setting bodies as they work toward developing strong regulatory, supervisory and other financial sector policies.
The Basel Committee on Banking Supervision (BCBS) is charged with setting general standards applicable to bank supervision; serving as a consultant for member nations; and formulating new international standards especially in such areas as capital and liquidity. Turkey is a BCBS member and senior‑level representatives of the CBRT took part in the Committee’s meetings during 2017. The CBRT representatives also participated in and contributed to various BCBS working sub‑group meetings at the technical level.
The CBRT also took part in the activities of the Islamic Financial Services Board (IFSB), whose fundamental duties are to develop and improve interest-free financial services so as to be in compatible with developments in the international financial system.
The CBRT and Qatar Central Bank became co‑chairs of the FSB Middle East and North Africa (MENA) Regional Consultative Group (RCG) on 1 July 2017 and the CBRT hosted the first meeting of the Group on 20 November 2017. The issues addressed at the meeting consisted of the FSB’s ongoing activities, regional issues pertaining to fragilities and financial stability, financial innovations and cyber‑risks, the high level of global indebtedness, asset quality and settlement issues, and misconduct risk in the financial sector.
(1) Article 33 of the Law on Amendments to Some Tax Laws and Various Laws issued in Official Gazette dated 5 December 2017 and Article 44 of the Central Bank Law
No. 1211 dated 14.1.1970 have been amended as follows:
“Authority to request information from real and legal persons Article 44‑ (The redrafted Article 44 by Law No. 7061 of November 28, 2017, which was repealed by Law No. 6111 of February 13, 2011)
The Bank shall, in order to monitor the operations of real and legal persons which affect their foreign exchange position, be authorized to request all kinds of information and documents from real and legal persons that it shall determine. The procedures and principles, including also the scope, collection and monitoring methods, supervision of the accuracy and sharing of the information and documents to be requested and provision of outsourcing services, shall be determined by the Bank.
In the implementation of this article, the provisions of Article 35 and sub‑paragraph (a) of paragraph (II) of Article 68 of this Law shall also apply to employees of outsourcing institutions.”
