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2.3 Financial Stability Developments and Activities
The global economic policy uncertainty was on the uptrend throughout 2018. The risk appetite for emerging market economies (EMEs) decreased due to increased total indebtedness, persistent tightening in monetary policies of advanced economies, appreciation of the US dollar, protectionist trade measures and policy uncertainties in some advanced economies, in Italy and the UK in particular. Consequently, EMEs witnessed net portfolio outflows in the period following the first quarter of 2018. While the global economic outlook remained positive, divergences among countries became pronounced and downside risks to economic activity increased. The uptrend in commodity prices observed since 2016 due to global demand and protectionist trade measures was replaced by a rather fluctuating trend. Country-specific risks, geopolitical developments and the tightening in global liquidity conditions constituted the risk factors affecting the economic growth outlook in EMEs.
Due to macroprudential measures introduced in recent years, household financial assets have been growing faster than household financial liabilities. As of January 2018, the growth in assets has accelerated whereas the growth in liabilities has lost pace. Accordingly, the household financial leverage ratio (liabilities/assets) decreased at an accelerated rate and stood below 45%. The increase in financial assets was primarily driven by Turkish lira and foreign currency (FX) deposits while the increase in individual credit card balances in addition to housing and personal loans affected the liabilities. By September 2018, Turkey’s household indebtedness (debt/GDP) was 16.8%, standing significantly below the average of selected EMEs at approximately 30%.
The upward trend in the financial leverage of corporate sector companies continued and the ratio of corporate loans to GDP remained below the averages of the G20, EMEs and the world in 2018. The corporate sector’s Turkish lira credit indebtedness, which increased due to measures and incentives introduced in 2017, started to rebalance in 2018. The corporate sector’s use of FX credits decreased due to the volatility in exchange rates, increased awareness about exchange rate risk management, harmonized measures, and the rebalancing in economic activity.
The credit growth that was supported by incentives such as the Credit Guarantee Fund (CGF) facility in the first half of 2018 decelerated in the second half of the year due to the rebalancing in economic activity, tightening in financial conditions and the strengthened liquidity preference of the financial sector. With the transition to the Turkish Financial Reporting Standard (TFRS 9) accounting system in early 2018, banks started using in their credit classifications subjective internal assessment models that include expectations regarding the macroeconomic outlook and international developments. Accordingly, the ratio of closely monitored loans increased in line with the modest deterioration in asset quality. Despite the decelerating economic activity, the exchange rate volatility and the TFRS 9-driven slight increase in the Non-Performing Loans (NPLs) ratio, the positive outlook in the banking sector’s asset quality was maintained.
Liquidity coverage ratios (LCR) showing the short-term liquidity positions of the banking sector are well above the legal ratios for total and FX liquidity. Recently, there has been an improvement in the loan-to-deposit ratio (L/D), one of the indicators used to monitor the long-term liquidity risk outlook of the sector. The L/D ratio somewhat decreased as the deceleration in loan growth rates was stronger than the decline in deposit growth rates. The share of deposits, which are among the core liabilities constituting banks’ main funding source, in non-equity liabilities is 55%. Because deposits are stable funds, the banking sector is hedged against the risk of short-term funding. The share of external debts in foreign funding sources is limited.
Banks’ use of external funding sources increased in the first half of 2018 but started decreasing in the second half of the year. This decrease was driven by reduced investment appetite for emerging economies, global supply conditions and the impact of FX loan demand, which declined as of the second half of 2018 due to the deceleration in corporate sector investments as well as measures and increased awareness regarding exchange rate risk management, on the need for foreign sources.
Despite the tightening in global markets, banks were successful in managing the fall in external debt rollover ratio via the use of available liquidity buffers. Banks’ liquidity buffers that they can use in the face of external financial shocks and that are composed of cash, free external accounts, unencumbered Eurobonds, ROM reserves and FX required reserves are sufficient to cover the external debt due within one year. Moreover, banks’ USD 35 billion worth of net currency swap position and the FX deposit facility offered by the CBRT with a limit of USD 50 billion also provide additional buffers against external shocks. On the other hand, the long-term nature of external debt and the wide range of creditors reduce the refinancing risk.
The positive outlook in the sector’s profitability and equity structure persists. The capital adequacy ratio of the banking sector is significantly above the minimum/target ratios stipulated by the Basel Committee (8%) and the Banking Regulation and Supervision Agency (BRSA) (12%). By November 2018, this ratio was 18.2% and it is also backed by the profitability performance of the sector. The return on equity and the return on assets are 14% and 1.5%, respectively. The flat course of the sector’s net profit and the issuances of subordinated debts by some banks in the second half of 2018 had positive effects on regulatory capitals.
To contribute to financial stability, the CBRT continues to work in cooperation and coordination with the authorities concerned.
In January, a comprehensive amendment was made in the Decree No. 32 on the Protection of the Value of the Turkish Currency concerning the use of FX loans. The CBRT took part in all stages of this amendment process. The Circular on Capital Movements – the secondary legislation of the amendment – was revised in line with the contribution and views of internal and external stakeholders, and it was put into effect on 2 May 2018. The revised circular arranges the details of implementations towards the alignment of FX credit borrowings of small-sized enterprises with their FX revenues.
One of the key financial stability issues is the FX indebtedness of the corporate sector. The CBRT is actively engaged in the Systemic Risk Data Monitoring Project for which the foundations were laid at Financial Stability and Development Committee meetings. The data monitoring system launched at the CBRT to manage the firm-based exchange rate risk is important in terms of reinforcing the infrastructure for the oversight of firms’ FX risk in the upcoming period.
In 2018, the CBRT continued to share its views and assessments concerning financial stability via its biannual Financial Stability Report. In addition, the CBRT also continued to contribute to the economics literature by means of working papers, research notes in economics, and articles published in international journals. Besides, assessments on financial stability issues are also shared via articles posted on the CBRT Blog.
The CBRT continues to support international publications and meetings in cooperation with other agencies and organizations. The CBRT’s bilateral 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 in 2018 as well. These relations take the form of exchanging views on issues dealt with in reports that the organizations intend to publish. In addition to face-to-face meetings, the CBRT also submits written opinions about reports published by organizations. The CBRT also undertakes work to establish cooperation with related authorities.
In 2018, the CBRT continued to engage in efforts aimed at enhancing its representational influence and effectiveness as well as contributing to financial stability on international financial platforms. The Bank participated at the highest level in the Plenary and Standing Committee meetings of the Financial Stability Board (FSB), which aims to establish financial stability through its duties to coordinate the work of national financial authorities and international standard setting bodies, and to develop and enforce 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. The CBRT attended the BCBS meetings at senior level, and participated in and contributed to various BCBS working sub-group meetings at the technical level.
The CBRT also continued to take part in the regulatory activities of the Islamic Financial Services Board (IFSB), whose fundamental duties are to develop and improve interest free financial services so as to be compatible with developments in the international financial system.
Work carried out with these institutions focused on the development and implementation of financial regulations that would contribute to achieving financial stability. The CBRT conducted this work under an active cooperation with the related authorities of Turkey.
The CBRT and Qatar Central Bank, acting in their capacity as the co-chairs of the FSB Middle East and North Africa Regional Consultative Group (RCG), organized two meetings hosted by the CBRT on 5 May 2018 and 5 November 2018 in Istanbul. The CBRT contributed to the drawing up of meeting agendas and contents.
Accordingly, the issues addressed at the meetings consisted of the FSB’s ongoing activities, regional issues pertaining to fragilities and financial stability, infrastructure investments and their financing in emerging economies, impacts of expanding crypto asset markets on financial stability, financing of Small and Medium-Sized Enterprises (SMEs) and effects of Basel regulations, use of financial technologies in the region, and issues concerning the regulation on the Net Stable Funding Ratio.
