The CBT on the one hand reduced the amount of funds banks can extend in form of credits and on the other hand provided one-week maturity funds to them in order to maintain the weekly repurchase rate at the identified level.

The most crucial step the Central Bank of Turkey (CBT) took with the aim to reduce the volume of credits extended by the banking sector was to increase the required reserve ratio. With this the ratio used in the calculation of reserves banks has to keep at the CBT for three-month or shorter term deposits was raised. The required reserve ratio for longer-term maturity deposits was not changed. The decision was announced to the public on January 24.

Changes in the required reserve ratios do not enter into effect immediately. The new ratio announced on January 24 for instance became valid for the deposits that enter balance sheets of banks as of February 4. So, banks calculated the amount of reserves that they have to keep at the CBT in line with the total amount of deposits in their balances as of that date. The process functions like this: the 'establishment period' begins two weeks after the Friday when the calculation was made (February 4 and February 18). This period lasts fifteen days. To put it differently, the establishment period covers the two weeks between February 18 and March 4. 

The amount deposited at the CBT might change
The implementation process involves a certain flexibility: Assume that the amount of reserves Bank A has to keep at the CBT on the basis of the amount deposited by February 4 is 100 liras. The Bank A is not obliged to deposit the amount to the CBT each day between February 18 and March 4. What is important is that the Bank A keeps in average 100 liras at the CBT over this period. That is, it can deposit 90 liras one day and 110 liras the other day.

Figures on the credit volume are declared by the CBT and the Bank Regulation and Supervision Agency (BRSA).  The latest data available is on consumer loans as announced by the CBT on February 25. The latest data on credits was announced on February 18. Therefore, it is yet impossible to see the impact of the CBT's recent decisions entirely. But we can make a preliminary assessment on the consumer loans as we have data for the mid-point of the establishment period.

So this is the outlook: Volume of consumer loans did not decrease. The volume of total consumer loans by February 25 is 0.68 percent higher than that by February 18. Moreover, the volume of consumer loans has been increasing over the last five weeks. This Thursday data on consumer loans for March 4 and total credits for February 25 will be announced. Then it will be possible to make a more solid evaluation. 

Banks were provided with one-week maturity funds
Previously I have examined the 'dilemma' of the CBT with a series of commentaries and emphasized that the dilemma could be eased should the BRSA stepped in. In order to identify the viciousness of this dilemma we need to examine the amount of funds the CBT sell to banks through repurchase agreements as well as the change in the credit volume.

The amount of funds the CBT transferred to banks increased by 20.8 percent (5 billion liras) between February 18 and February 25 and by 81 percent (13 billion lira) between February 4 and February 25. In other words, the CBT on the one hand increased the required reserve ratio to reduce the amount of funds banks can extend in form of credits and on the other hand provided one-week maturity funds to them in order to maintain the weekly repurchase rate at the identified level.

If banks rely on short term funds to extend credits as in the case for Turkey, increasing the required reserve ratio to reduce the amount of funds banks can extend in form of credits on the one hand and providing one-week maturity funds to them in order to maintain the weekly repurchase rate at the identified level on the other hand is quite contradictory. This was the dilemma I have been talking about. Let us wait and see the figures to be announced on Thursday.

This commentary was published in Radikal daily on 08.03.2011