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2.3 Financial Stability Developments and Activities
Concerns over global growth, protectionist trends in global trade policies, and geopolitical developments have all fueled uncertainties regarding global economic policies. Central banks of advanced economies leaned towards expansionary monetary policies on the back of the change in growth and inflation outlook, which contributed to improvement in global financial conditions and led to an increase in risk appetite towards emerging market economies (EMEs). Nevertheless, despite the improvement in global financial conditions, the uncertainty on a global scale played an important role in the fluctuations in portfolio flows towards EMEs. Global indebtedness continued to be a major vulnerability in advanced economies as well as in EMEs stemming particularly from increasing indebtedness of the corporate and public sectors. The fact that profitability in the banking sector remained lower compared to the pre-financial crisis period, has been another vulnerability factor. Yield curves that flattened on the back of expansionary monetary policies implemented by advanced economy central banks, weak global economic activity and country or bank-specific factors such as deterioration in asset quality have been the factors that led to this development. Currencies of advanced economies and EMEs have generally displayed a fluctuating trend against the US dollar. The slowdown in global economic activity, high indebtedness, global trade disputes, Brexit uncertainty and geopolitical developments are some of the factors that have threatened financial stability.
As for macroeconomic developments in Turkey, consumer inflation decreased significantly owing to the base effect throughout 2019, demand developments, the tight monetary policy stance, the easing in producer inflation-led pressures, and flatter exchange rates. In the framework of the economic rebalancing process, particularly as of the third quarter of the year, economic activity displayed an uptrend on the back of the fall in uncertainties and market volatility. Leading indicators suggest a similar trend in the fourth quarter. The current account deficit narrowed rapidly as a result of the rebalancing process and export developments. The monetary policy steps taken throughout the year had an easing effect on the financial conditions that had been tightened in the previous year.
Household financial assets continued to grow faster than household financial liabilities, however, recently, growth in assets slowed down while growth in liabilities started to accelerate. As the two growth rates converged, the decline in household leverage ratio slowed down and stood at 38%. The growth in liabilities was driven by the rise in housing loans as well as the realization of pent-up spending through general-purpose loans and personal credit cards after the decline in interest rates. Meanwhile, the rise in household financial assets continued to be driven mainly by TL and FX-denominated savings deposits. The contribution of TL deposits to asset growth has been increasing thanks to the stable outlook of the TL and the decelerating dollarization since June 2019. In addition, Turkey ranked significantly lower than the EME average with a household indebtedness ratio of 14% in 2019.
In 2019, corporate sector indebtedness decreased. This decrease is attributed to the decline in FX loans owing to the amendments made to Decree No.32 Regarding the Protection of the Value of the Turkish Currency, weak investment demand, and the enhanced awareness of FX risk management.
The ratio of the corporate sector’s TL debts to GDP slightly increased thanks to incentive packages announced during the year and the amendments to the RR framework supporting TL borrowing. The corporate sector’s total loans to GDP ratio continued to hover below G20, EME and the world average in 2019.
The fall in FX loans and the recovery in economic activity led to a decline in the volume of derivative transactions between non-financial firms and banks and the number of firms using derivatives. Publicly listed firms’ interest coverage ratio measuring the ability of firms to cover their interest and financial expenses with their operating earnings, which declined in 2018 due to higher exchange rate and interest expenses, showed some improvement in 2019.
In the first two quarters of the year, annual loan growth rates, particularly of consumer loans, remained weak owing to domestic macroeconomic developments and tightening financial conditions. In the following period, both the normalization in financial conditions and improvement in economic activity and expectations had a positive impact on financial intermediation activities. As of the third quarter, there has been a remarkable recovery in almost all loan types and in the whole banking sector in general. . Thus, trend indicators for consumer and commercial loan growth surpassed those of previous periods. Public banks’ proactive stance in credit markets, improved liquidity conditions, the incentive programs for investment and business loans led by public banks and the decrease in interest rates have been the key factors behind the recovery in the loan market. Moreover, the countercyclical framework implemented by the CBRT linking reserve requirements with loan growth of banks has underpinned the rise in loans across the banking sector.
In 2019, the Non-Performing Loan (NPL) ratio in commercial loans rose moderately due to the lagged effects of the developments in economic activity on firms’ balance sheets. Meanwhile, NPL ratios of retail loans remained low, following the historical trends. In the upcoming period, the recovery in loan growth and economic activity outlook are expected to contribute positively to the asset quality of the banking sector.
The banking sector’s short and long-term liquidity indicators are strong and support the credit outlook. The sector’s use of external funding sources decreased on the back of the positive trend in FX liquidity indicators and declining FX funding need. This decrease in FX funding need was driven by the decline in FX credit demand and corporate sector’s weak investment appetite. The decline in the external borrowing has been a positive development with respect to banks’ short-term debt roll-over capacity as well.
As a result of the improvement in inflation expectations and easing in uncertainty perceptions, TL deposits increased and banks, thus, had adequate liquidity to meet the increased credit demand. Moreover, on the back of the recent recovery trend in TL loans coupled with the decline in interest rates, banks’ TL borrowing via domestic funds has increased.
The positive outlook in the sector’s equity structure is maintained. The capital adequacy ratio of the banking sector is significantly above the minimum ratios stipulated by the Basel Committee (8%) and targeted by the Banking Regulation and Supervision Agency (BRSA) (12%). By November 2019, this ratio was 18.63%. Even if the profitability of the sector is on a downtrend recently, it is still supportive of equity. The downtrend in profitability can be attributed to asset quality developments and rebalancing in economic activity as well as the slowdown in credit growth. The return on equity and the return on assets were 11.2% and 1.2%, respectively.
Likely risks to financial stability are discussed on various platforms primarily by the Economic Coordination Committee and the Financial Stability and Development Committee and necessary measures are taken to address these risks immediately. In this framework, the CBRT collaborates with the related authorities and acts in coordination with them.
Corporate sector’s FX indebtedness remained at the financial stability forefront in 2019. The data monitoring system, which was launched at the CBRT to manage firm-based exchange rate risk, will be important in terms of reinforcing the structure for the oversight of firms’ FX risk in the upcoming period. The CBRT continued routine communication with banks in order to closely monitor financial sector developments, the effects of new arrangements, credit supply and demand, banks’ asset quality, the external financing outlook as well as expectations and risks.
In 2019, the CBRT continued to share its views and assessments concerning financial stability with the public via its semiannual Financial Stability Report. Moreover to contribute to the economics literature in the field of financial stability, the CBRT also continued to issue working papers and research notes in economics, and to publish papers in international journals, whose findings are supportive of the evaluations stated in the Financial Stability Report in a more academic manner and. The CBRT Blog, which is a platform for CBRT staff to share their views and contribute to the economic agenda, also includes assessments on financial stability issues.
The CBRT has supported international policy reports 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 2019 as well. These relations range from meetings to providing written opinions for reports published by these organizations. The CBRT has also undertaken activities towards establishing and furthering cooperation with related international authorities.
In 2019, the CBRT continued to engage in efforts aimed at enhancing its representation and effectiveness on international financial platforms as well as engaging in efforts contributing to financial stability. The Bank pursued senior level participation at the Plenary, Steering Committee and Standing Committee meetings of the Financial Stability Board (FSB), which aims to enhance global financial stability assuming its duties to coordinate the work of national financial authorities and international standard setting bodies, and developing as well as enforcing strong regulatory, supervisory and other financial sector policies.
The Basel Committee on Banking Supervision (BCBS) is entrusted with the task of setting general standards applicable to bank supervision, consulting member jurisdictions, and establishing new international standards regarding particularly capital adequacy and liquidity frameworks. The CBRT attended the BCBS meetings at the senior level, and participated in and contributed to various BCBS working sub-group meetings at the technical level.
The CBRT also took an active part in the regulatory development and knowledge sharing activities of the Islamic Financial Services Board (IFSB), whose fundamental duty is developing and improving global interest-free financial services sector in line with developments in the international financial system.
Activities carried out with the above-mentioned institutions focused on the development and implementation of financial regulations that would contribute to achieving financial stability. The CBRT conducted these activities in effective cooperation with the related authorities in Turkey.
In addition, the CBRT and the Qatar Central Bank, who co-chaired the FSB Regional Consultative Group (RCG) for the Middle East and North Africa region between July 2017 and June 2019, organized a meeting in Istanbul on 4 May 2019 hosted by the CBRT.The meeting was a fruitful platform to discuss an array of important topics such as ongoing regulation activities of the FSB, regional vulnerabilities and issues pertaining to financial stability, the impact of market fragmentation on financial stability, the effect of interest rate benchmark reforms on MENA financial system and financial stability monitoring frameworks. As of 1 July 2019, the co-chairmanship role for RCG MENA shifted to Saudi Arabian Monetary Authority for a period of two years.
