Recent development

On August 29, 2015, the Central Bank of Turkey amended its Communiqué on Reserve Requirements, increasing bank reserve requirements for short-term foreign exchange non-core liabilities. The liabilities subject to the new requirements include repo transaction funds, utilized loans, net issued securities, subordinated debt not included in banks' own funds, net liabilities to headquarters abroad, and debt from credit card transactions.

In a separate action, the Central Bank also increased the interest paid on Turkish lira reserves at the Central Bank.

The Central Bank's new reserve requirement ratios will apply to liabilities incurred after August 28, 2015, effective from the October 23 maintenance period. The changes are not retroactive and the current ratios continue for liabilities incurred on or before August 28 until their maturity.

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The Central Bank also increased the interest paid on Turkish lira-denominated required reserves deposited with the Central Bank by 150 basis points. The increase will be phased in over the next four months: (i) 50 basis points as of September 1, (ii) 50 basis points on October 1, and (iii) 50 basis points on December 1. 

Conclusion

The Central Bank's action is intended to incentivize banks to increase long-term foreign exchange liabilities by increasing the cost of holding short-term liabilities. This is expected to increase bank resilience during a slowdown in short-term foreign exchange inflows. Banks, however, may face greater pressure to satisfy increasing reserve requirements. The increase in interest paid for Turkish lira denominated reserves is intended to offset bank losses due to the devaluation of the Turkish lira and rising inflation.