Macroprudential Policies : Turkish Experience

Murat ÇetinkayaDeputy Governor

November 7, 2013Istanbul

Contents

I. Macro-prudential Policies : Rule-Based vs. Discretionary

II. Macroprudential Policy Framework in Turkey

III. Turkey: How did we do so far?

IV. Conclusion

2

MACRO-PRUDENTİAL POLİCIES:RULE-BASED VS. DİSCRETİONARY

3

«Systemic Risk»

Post-Lehman challenge : Re-orienting prudential regulation towards containing «systemic risk»

«We will amend our regulatory systems to ensure authorities are able to identify and take account of macro-prudential risks across the financial system”

G - 20 Declaration on Strengthening the Financial System, 2 April 2009

4

Macro-prudential Policy

Aim at addressing systemic risk with ways to :

Measure and assess accumulation of risk (system –wide)

Avoid boom –bust cycles (in supply of credit and liquidity)

Handle risks related with interconnectedness (spill-over)

5

Macro-prudential Policy

Two dimensions :

Cross-sectional dimension : Risk distribution at a point in time (across sectors/agents)

Time dimension : Evolution of aggregate risk in the system

6

Macro-prudential Policy

The framework should aim to achieve :

Transparency

Accountability

Predictability

7

Macro-prudential Policy

Rule-Based• Transparent, lower risk of inaction• Provide pre-commitment• Provide regulatory certainty• Not dynamic and flexible• Susceptible to circumvention

Discretionary• Adaptable and flexible• Takes into account different types of risks and structural changes• Less transparent• Limited regulatory predictability• Subject to forbearance in favor of wrongdoers

8

Source: IMF Staff Analysis

Macro-prudential Policy

Fixed• Provide a minimum buffer• Low administrative cost• Ineffective in rapidly changing circumstances

Time-Varying• Avoid timing the cycle (automatic stabilizers)• Lean against the wind, countercyclical• Ad hoc and frequent changes may be disruptive• Hard to time the cycle, danger of staying behind the curve

9

Source: IMF Staff Analysis

Rules vs. Discretion

Rule-based or discretionary macroprudential policy?

A rule-based counter-cyclical framework with

«constrained discretion» at turbulent times.

10

MACROPRUDENTİAL POLİCY FRAMEWORK İN TURKEY

11

Policy Framework

12

Structural Tools by CBRT

13

Maturity Based Reserve Requirements

Currency Based Reserve Requirements

Leverage Based Reserve Requirements

Reserve Options Mechanism

Maturity Based Reserve Requirements

14

Currency Based Reserve Requirements

15

TL Reserve Requirements FX Reserve Requirements

Source: CBRT. Source: CBRT.

Leverage Based Reserve Requirements

16

Reserve Option Mechanism

FX ROM Utilization Ratio(Percent)

Gold ROM Utilization Ratio(Percent)

Source: CBRT. Source: CBRT.

17

Cylical Tools by CBRT

18

Policy Rate

Interest Rate Corridor

TL Liquidity Management

FX Liquidity Management

19

Source: BIST, CBRT.

Interest Rate Corridor and Average Funding Rate(Percent)

Liquidity Policy

*TS: Tapering SignalLast observation: 30.10.2013

QE2Eurozone Debt

Crisis

Lehman Crisis

QE3

20

Source: CBRT

CBRT Funding(Billion TRY)

Liquidity Management

Macroprudential Measures by BRSA

Levy on Consumer Loans

Loan-to-Value Restrictions

Risk Weight on Consumer Loans

General Provisioning Requirements

21

Recent Policy Actions

With the amendments on 8 October 2013, new regulations have been declared with regards to both corporate and retail loans.

Amendments made in retail loans related to :• Credit Card Limits• Minimum Payment Ratios• Risk Weights in CAR

A new tool in MP policy: Loan-to-Income Ratio

22

TURKEY: HOW DİD WE DO SO FAR?

23

24

Source: CBRT.

Current Account Deficit(12-Month Rolling, Billion USD)

Rebalancing: Current Account

MacroprudentialTightening

MonetaryTightening

MacroprudentialTightening +

Monetary EasingMonetaryTightening

25

Source: BRSA.

Total Loan* Growth Rates (YoY Change, Percent)

Rebalancing: Credit Growth

*Total credit is inclusive of all types of banks (deposit banks, participation banks, and development/investment banks) and credit cards.

Source: CBRT.

Main Sources of Current Account Deficit Finance(12-Month Cumulative, Billion USD)

Quality of Capital Inflows

*Long term capital movements are sum of banking and real sectors’ long term net credit and bonds issued by banks and the Treasury. **Short term capital movements are sum of banking and real sectors' short term net credit and deposits in banks.

26

27

Source: CBRT.

Weighted Average(Days)

Maturity of Deposits

Last observation: 25 October 2013

28

Source: CBRT.

Composition of Reserves(Billion USD)

CBRT International Reserves

Last observation: 25 October 2013

Source: Bloomberg, CBRT.

Selected EMEs(Percent, Next 12 months implied volatility)

Exchange Rate Volatility

EMEs: Brazil, S.Africa, Indonesia, India, Turkey.

29

CONCLUSION

30

Conclusion

A rule-based approach with constrained discretion at certain phases of cycles seems to be the best approach in conducting macroprudential policies.

The implementation of macroprudential policies yield pre-commitment and credibility as well as dynamism and flexibility to the policy-making.

Macroprudential and monetary policy instruments in EMEs need to be used appropriately in order to minimize the impact of associated volatility in capital flows.

31

Conclusion

Macroprudential policies aim at improving the resilience of the financial system. They should be supported with structural reforms.

Productivity enhancing structural reforms constitute the main drivers of economic growth in Emerging Market Economies.

The Central Bank’s contribution to growth in Turkey is via ensuring price stability and contributing to the financial stability.

32

Macroprudential Policies : Turkish Experience

Murat ÇetinkayaDeputy Governor

November 7, 2013Istanbul