Evaluation Note / Sarp Kalkan Short term fund inflows are harmful for banks

The monetary easing followed by the central banks in developed countries, FED to begin with, elevated short term fund flows towards developing countries including Turkey. Since the primary channel of entry for fund flows is the banking sector, the balance sheets of the sector became more risky. Buoyant domestic demand coupled with the hike in fund flows gave way to a rapid expansion in domestic credit volume. Total credit volume and consumer loan volume increased by 23 and 31 percent respectively over the first ten months of 2010.

Central Bank of Turkey, concerned about the expansion in domestic credit volume, put into effect a number of critical measures to mitigate the expansion which included increasing required reserve ratio and overnight borrowing rates. Lately in December 22^nd, Minister Ali Babacan met with chief executives of 49 banks in Ankara. The meeting also hosted senior officials from the Central Bank, Treasury, Bank Supervision and Regulation Authority and Capital Markets Board who are responsible for financial stability and regulations. It was highlighted in press that during the meeting, Mr. Babacan stressed that credit expansion threatened financial stability and monetary policy and called banks for slowing down credit expansion.