Turkey Tightens Regulations on Foreign Currency Deposists to Support Lira

Turkey's central bank on Friday tightened regulations preventing banks from holding foreign liquidity as the lira is under pressure, according to Bloomberg.

The decisions reinforced the rules previously in place, which regulate the retention of more savings in lira, which is one of the tools used by monetary policy makers to stabilize the local currency.

The latest amendments state that if 60% of the deposits with the Commercial Bank are not in Turkish lira; the bank will have to deposit more foreign liquidity with the central bank. This means that the mandatory reserve ratio for foreign currency deposits and participation funds of up to one year has been raised from 25% to 30%.

In a parallel context, another regulation stipulates that banks will have to buy an additional 7% of government bonds denominated in the local currency if their deposits fall below the 60% level.

Regulations published in the country's official gazette said the central bank would exempt lenders from holding some government bonds denominated in lira if the local currency deposits constituted 60% or more of their total deposits.

Increasing the share of the local currency in total deposits in banks is the cornerstone of the “conversion to the lira” strategy that the Central Bank seeks. Banking supervision data revealed that 59.2% of total deposits in banks were in lira as of March 31.

The pressure on the lira has been renewed during the past weeks, and major banks such as “HSBC” and “Morgan Stanley” expect the Turkish currency to decline sharply after the general elections expected to be held next month.