Turkish banks are to weigh 0% risk for held FX-denominated government paper in their capital adequacy ratios, banking watchdog BDDK has said. Previously, the banks were under instruction to weigh 100% risk on the paper since such issues are rated at deep junk.

Such regulations have been consistently executed in Turkey since 2016. As a result, the capital adequacy ratios and financial statements of lenders in the country are far from reliable.

The Erdogan administration also regularly taps hard currency from local banks by selling them FX-denominated domestic paper.

Meanwhile, under the government’s strategic credit fuelling to secure a rapid economic bounceback from last year’s recession (a strategy now in tatters given the damage wrought by the coronavirus, or COVID-19 pandemic), state-controlled lenders have been breaking records in extending new loans and persistent pressure from top officials (actually the word “threats” is not out of place here) on private banks to lend more reached the point where a minimum lending ratio was announced at the weekend.

Testing the limits of abnormality

Under normal conditions, the Turkish banking industry would play that ratio like a fiddle but conditions are testing the limits of abnormality as time passes.

The formula for the new ratio is:

Assets Ratio (AR) = (Loans + (Securities x 0.75) + (Central Bank Swaps x 0.5)) / (Turkish lira (TRY) deposits + (FX Deposits x 1.25)).

Government-run Halkbank (HALKB) and Vakifbank (VAKBN) boast 117% and 120%, respectively, thanks to the higher weight of state institutions’ TRY deposits in their deposit bases, according to Seker Invest’s calculations.

Among the private deposit banks, Yapi Kredi Bank (YKBNK) stands out with 106% vs. the private banks’ average of 101% thanks to its rather greater percentage of TRY deposits in total deposits.

Akbank (AKBNK) comes out less favourably due to the FX weight in its total deposits, according to Seker.

A Turkish banking analyst told Reuters that the asset ratio was hard to assess because banks do not disclose their swap volumes. “Only banks know this and they will report to the banking watchdog from now on,” the analyst said.

“This is a worrying development for institutions holding stocks and one of the reasons I've been very circumspect on the bank sector for a while. TRY can only head in one direction, especially with another hugely inappropriate rate cut looming [on Wednesday April 22] when 50bp will be added to Turkey's negative real return,” Julian Rimmer of Investec said on April 20 in a note to investors.

Some unnamed people with knowledge of the matter told Bloomberg on April 20 that the government would inject money into state banks. When and how much were not clear, they said.

The government last year injected some money into the state banks from the unemployment fund.

Rumours as monetary policy?

Officials have perhaps stepped up the use of external financing rumours as a monetary policy tool in Turkey.

“Hearing optimism in Turkey that external support could be on the cards via various FX swap facilities from the IMF and Fed/DM central banks,” Timothy Ash of Bluebay Asset Management said on April 17 in a note to investors.

During the weekend, the central bank governor gave a headline to government-run news service Anadolu Agency by suggesting that swap deal talks were being held with G20 central banks.

Anadolu also released a “flash” breaking news item quoting a statement from the presidential palace suggesting that Erdogan had discussed economic measures to be deployed in the coronavirus emergency with Donald Trump.

The White House did not release a statement on this latest phone call, but a statement on its website in relation to the previous call held on April 11 suggests that Trump and Erdogan simply discussed Syria, although Erdogan’s palace reported some economic discussions at that time too.

The market consensus is that a 50bp rate cut will eventuate from the Turkish monetary policy meeting to be held on April 22—meanwhile, the government grasps at external financing straws to keep the USD/TRY below the 7.00 borderline as the FX reserves go south.