2

Outline

I. Financial Development and the Associated

Policy Trade-Offs

II. Perspectives from the Turkish Experience

3

I. Financial Development and the Associated

Policy Trade-Offs

4

Financial development is a multi-dimensional concept.

Different dimensions of financial development:

Financial depth (credit deepening)

Access to financial services

Intermediation costs

Stability of intermediation (non-performing loans)

Policies that affect the pace of financial development are multi-dimensional

as well:

Fiscal performance (low public borrowing requirement)

Monetary policy performance (low and stable inflation)

Legal-structural reforms and banking regulations

Financial and trade openness

Financial literacy

Where do financial-stability-oriented policies come into play?

5

Financial development: "Too much" of a good thing might

be harmful.

Finance and Growth Nexus

Financial development promotes capital accumulation and growth

especially in an emerging economy with low domestic savings.

Credit Booms and Financial Fragility

However, rapid credit booms might leave the entire economy more

vulnerable to tail events.

Need to formulate policies that ensure a healthy pace of financial

development.

Improved balance sheet

of non-financial firms +

Higher collateral values

Loosened

credit standards

+ higher credit supply

Higher growthin domestic

credit

Higher investment

+ consumption

Upturn in economic

activity

Opposite cycle happens at downturns bringing a sharp drop in Credit/GDP and

leading to a crisis.

Need to take timely, well-targeted and coordinated policies to tame the financial

cycle.

A positive

shock to the

economy

Taming the financial cycle is important for financial

deepening to be permanent.

6

Financial Amplification Mechanism

CurrencyAppreciation

Improved balance sheet

of non-financial firms +

Higher collateral values

Higher growthin domestic

credit

Further improvement

in risk perceptions

Surge in capitalinflows

Need to take timely, well-targeted and coordinated policies to reduce the

sensitivity of:

capital inflows to global financial conditions

domestic credit cycles to capital inflows

Favorable

global

financial

conditions

EM Perspective: Capital flows might amplify the financial

cycle….

7

8

…adding an extra layer of complication to the policy

design problem.

Significant progress has been made in understanding the perimeter

and the effectiveness of macro-financial stability tools in recent

years.

Key ingredients to consider:

Formulation

Assessment

Leakages

Communication

Coordination

9

II. Perspectives from the Turkish Experience

Turkey has gone through a rapid financial deepening

process starting in early 2000s…

10

67,4 %

0

10

20

30

40

50

60

70

80

19

87

19

89

19

91

19

93

19

95

19

97

19

98

20

00

20

02

20

04

20

06

20

08

20

09

20

11

20

13

20

15

20

17

Domestic Credit Stock/GDP*(Percent)

* Last observation for GDP is for 2017Q2. Source: CBRT, TURKSTAT.

…quickly catching up with peer emerging economies.

11

Domestic Credit Stock/GDP(Annual, Percent)

Source: World Development Indicators.

99,0 %

70,3 %

66,2 %

0

20

40

60

80

100

120

140

19

60

19

64

19

68

19

72

19

76

19

80

19

84

19

88

19

92

19

96

20

00

20

04

20

08

20

12

20

16

High income (OECD countries)

Turkey

Emerging Markets

Structural reforms paved the way for the acceleration in

financial deepening.

12

Major structural changes following the 2001 crisis:

New monetary and exchange rate policy framework

Flexible exchange rate regime

New Central Bank Law

Price-stability-oriented monetary policy

Banking sector reform

Recapitalization and restructuring of state banks

Establishment of Banking Regulatory and Supervisory Agency (BRSA)

Public sector reforms

Social Security Reform

Reforms to enhance competition

Strong emphasis on fiscal discipline

13

Risk premium and real interest rates fell in tandem with inflation

and public debt, all contributing to financial deepening.

Source: Bloomberg. Source: Bloomberg.

Credit Default Swap (CDS)

(5-year, Basis Points)

0

200

400

600

800

1000

1200

1400

01

/01

07

/02

01

/04

07

/05

01

/07

07

/08

01

/10

07

/11

01

/13

07

/14

01

/16

07

/17

Treasury Bill Rate(Annual Average, Compound)

-5

15

35

55

75

95

08

/01

01

/03

06

/04

11

/05

04

/07

09

/08

02

/10

07

/11

12

/12

05

/14

10

/15

03

/17

Nominal Real

14

Towards the road to the introduction of

financial stability tools

Source: CBRT

-30

-15

0

15

30

45

60

11

/08

02

/09

05

/09

08

/09

11

/09

02

/10

05

/10

Beginning of

Quantitative

Easing (QE) by

Fed

Total Loan Growth Rates (13 Weeks Moving Average,

Annualized, FX Adjusted, Percent)

Real Exchange Rate

(2003=100)

Credit growth accelerated due to strong capital inflows in

the aftermath of the global financial crisis.

100

105

110

115

120

125

03

/09

06

/09

09

/09

12

/09

03

/10

06

/10

09

/10

Beginning of QE

15

Source: CBRT

Main Sources of External Financing*(12-months Cumulative, Billion USD)

*Short-term capital movements are sum of banking and real sectors' shortterm net credit and deposits in banks.**Long-term capital movements are sum of banking and real sectors’ longterm net credit and bonds issued by banks and the Treasury.Source: CBRT.

Widening in the current account deficit, financed with

short-term inflows called for an immediate policy action.

Current Account Balance(Seasonally Adjusted, Quarterly Average, Billion USD )

Source: TURKSTAT, CBRT.

-8

-7

-6

-5

-4

-3

-2

-1

0

4 1 2 3 4 1 2 3 4 1 2 3 4 1

2008 2009 2010 2011

-20

-10

0

10

20

30

40

50

60

70

80

20

07

:09

20

07

:11

20

08

:01

20

08

:03

20

08

:05

20

08

:07

20

08

:09

20

08

:11

20

09

:01

20

09

:03

20

09

:05

20

09

:07

20

09

:09

20

09

:11

20

10

:01

20

10

:03

20

10

:05

20

10

:07

20

10

:09

20

10

:11

20

11

:01

FDI and Long-Term**

Portfolio and Short-Term*

Current Account Deficit

16

17

Macroprudential Policy Design

Starting from 2010, Inflation Targeting (IT) is augmented with

a financial stability objective.

18

2006-2010: Conventional Inflation Targeting

2011-2016 April: Financial Stability and IT

2016 April to date: Strengthed focus on the price stability

with a structural emphasis and coordination

19

Financial Stability Committee (FSC) was established to ensure

coordination in macroprudential policy (MaP) framework.

UNDERSECRETARIAT OF TREASURY

BANKING REGULATION AND

SUPERVISION AGENCY

SAVINGS DEPOSIT

INSURANCE FUND

CAPITAL MARKETS BOARD

CENTRAL BANK OF THE REPUBLIC OF

TURKEYFINANCIAL STABILITY

COMMITTEE

CHAIR: DEPUTY PRIME MINISTER

Organization Structure Founded in June 2011.

Enhances information sharing,

coordination and cooperation.

Main duties are to assess the

systemic risks, identify necessary

measures, and make relevant

policy recommendations.

No decision power or tools; the

power rests with the authorities

represented in the Committee.

Each institution has its own

mandate and responsibility.

Turkey has gone through three main phases of

macroprudential regulation to smooth credit cycle

20

First Round (2011)

Higher risk weights and provisions for consumer loans.

Limits to credit card payments

LTV cap for housing loans

Second Round (2013-2014)

Caps, limits, and higher risk weights on credit cards

Maturity restrictions (36 months) for uncollateralized consumer loans

LTV cap for vehicle loans

Recently (end-2016)

Reversal of MaP, and introduction of Treasury-backed credit guarantees

21

Source: CBRT.

Loan Growth Rates (Annual percentage change)

Inclusive of loans extended by all types of banks (deposit banks,

Participation banks, and development/investment banks). FX adjusted.

0

5

10

15

20

25

30

35

40

45

50

0

5

10

15

20

25

30

35

40

45

50

01

/10

06

/10

11

/10

04

/11

09

/11

02

/12

07

/12

12

/12

05

/13

10

/13

03

/14

08

/14

01

/15

06

/15

11

/15

04

/16

09

/16

02

/17

07

/17

Commercial

Consumer

II

MaP Tightening

I

MaP Easing

III

Macroprudential policies have succeeded in

smoothing credit cycles…Macroprudential policies have succeeded in smoothing

credit cycles…

…while banking sector has been kept well-capitalized

and liquid,…

22

Note: Capital Adequacy Ratio: Bank capital-to-risk-weighted assets ratio.

0

20

40

60

80

100

120

140

160

180

200

03

/14

06

/14

09

/14

12

/14

03

/15

06

/15

09

/15

12

/15

03

/16

06

/16

09

/16

12

/16

03

/17

06

/17

FX Liquidity Coverage Ratio

Legal Ratio (FX)

Total Liquidity Coverage Ratio

Legal Ratio

10

15

20

25

30

35

10

/03

09

/04

08

/05

07

/06

06

/07

05

/08

04

/09

03

/10

02

/11

01

/12

12

/12

11

/13

10

/14

09

/15

08

/16

07

/17

Note: Excluding development and investment banks. Based on non-consolidated reportings.

Capital Adequacy Ratio

(Percent)

Liquidity Coverage Ratio

(Percent)

Source: BRSA. Source: BRSA.

… with stable and relatively low non-performing loan ratios.

23

0

2

4

6

8

10

12

14

16

18

20

07/…

02/…

09/…

04/…

11/…

06/…

01/…

08/…

03/…

10/…

05/…

12/…

07/…

02/…

09/…

04/…

11/…

06/…

01/…

08/…

03/…

10/…

05/…

12/…

07/…

Consumer Loans NPL Corporate Loans NPL

Non-Performing Loans (NPL)

(Percent)

Source: BRSA.

24

0

2

4

6

8

10

12

14

0

2

4

6

8

10

12

14

06

/1 0

07

/1 0

08

/1 0

09

/1 0

10

/1 0

11

/1 0

12

/1 0

01

/1 1

02

/1 1

03

/1 1

04

/1 1

05

/1 1

06

/1 1

07

/1 1

Reserve Requirement ratio (RRR)

Effective RRR

Required Reserve Ratios (RRR) were actively used to curb

excessive credit growth …

Source: CBRT.

… and to ensure prudence by banks in several dimensions.

25

10

12

14

16

18

20

12

/11

03

/12

06

/12

09

/12

12

/12

03

/13

06

/13

09

/13

12

/13

03

/14

06

/14

09

/14

12

/14

03

/15

06

/15

TL vs FX (short term)

TL short

FX short

10

12

14

16

18

20

12

/11

03

/12

06

/12

09

/12

12

/12

03

/13

06

/13

09

/13

12

/13

03

/14

06

/14

09

/14

12

/14

03

/15

06

/15

Core vs Non-core (FX)

Core FX

Non-Core FX

4

5

6

7

8

9

10

11

12

12

/11

03

/12

06

/12

09

/12

12

/12

03

/13

06

/13

09

/13

12

/13

03

/14

06

/14

09

/14

12

/14

03

/15

06

/15

Short vs Long (core)

Core TL short

Core TL long

5

7

9

11

13

15

17

19

21

12

/11

03

/12

06

/12

09

/12

12

/12

03

/13

06

/13

09

/13

12

/13

03

/14

06

/14

09

/14

12

/14

03

/15

06

/15

Short vs Long (Non-core)

Non-Core short

Non-Core long

Source: CBRT.

26

Source: CBRT, CMB, PDP

42

45

48

51

54

57

60

01

/13

03

/13

05

/13

07

/13

09

/13

11

/13

01

/14

03

/14

05

/14

07

/14

09

/14

11

/14

01

/15

03

/15

05

/15

07

/15

09

/15

11

/15

01

/16

03

/16

05

/16

07

/16

09

/16

11

/16

01

/17

Average Maturity of Non-Core FX Liabilities

(Months)

RR Measures to encouragematurity extension

…as a result of which maturity of banks’ external liabilities

has increased considerably.

27

Source: Kara, Özlü and Ünalmış (2015)

The interaction between capital flows, exchange rate and bank

loans have been dampened since the implementation of MaPs.

Capital flows, Exchange Rate and Credit Cycles

(HP filtered, standardized)

-2,0

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

20

04

Q3

20

05

Q1

20

05

Q3

20

06

Q1

20

06

Q3

20

07

Q1

20

07

Q3

20

08

Q1

20

08

Q3

20

09

Q1

20

09

Q3

20

10

Q1

20

10

Q3

20

11

Q1

20

11

Q3

20

12

Q1

20

12

Q3

20

13

Q1

20

13

Q3

20

14

Q1

20

14

Q3

20

15

Q1

20

15

Q3

20

16

Q1

20

16

Q3

20

17

Q2

Loans (t) REER (t+3) Inflows (t+3)

The new policy mix

27

The contribution of global factors to Turkey’s monetary and financial

conditions have declined after the implementation of MaP policies.

28

Share of Global Factors* in Explaining Turkey’s Financial Conditions

(Percent)

*Global Factors are VIX, global growth, US treasury 10-year yield and 10-2 year spread.

Source: Kara, Özlü and Ünalmış (2015)

10

20

30

40

50

60

70

80

90

100

12

/0 8

06

/0 9

12

/0 9

06

/1 0

12

/1 0

06

/1 1

12

/1 1

06

/1 2

12

/1 2

06

/1 3

12

/1 3

06

/1 4

12

/1 4

06

/1 5

12

/1 5

06

/1 6

MaP measures

Final Remarks

29

Well-targeted and coordinated financial stability policies help

support long-run financial development.

Central banks may contribute by:

Deploying the tools at their disposal (e.g. Multiple RRRs, …)

Formulate well-targeted policies to directly address the structural issues

and facilitate coordination between relevant parties.

while keeping the main focus on price stability.

31

APPENDIX

32

Macroprudential Policies

Macroprudential Measures (Timeline)

Measure Description Adoption Date

Dividend PolicyRequires banks to seek approval from the BRSA before distributing dividends. The maximum dividend payout for CAR>18 percent is 20 percent, for 18 percent<CAR<16percent is 15 percent and for 13 percent<CAR<16 percent is 10 percent.

October 2008;extended in 2010

and 2011

Restrictions on FX lending

Allows non FX-earnings companies to borrow in FX from local banks (previously, only FX-earning companies could borrow FX), provided FX loan amount is greater than US$5 million and maturity date is longer than a year; bans consumers from taking out FX-linked loans.

June 2009

Loan-to-value (LTV) ceilingsImplements loan-to-value ceilings on housing loans to consumer (at 75 percent) and on purchases of commercial real estate (at 50 percent).

December 2010

Guidance to CapCredit Growth

The authorities provided guidance to banks that credit growth (adjusted for FX movements) in 2011 should not exceed 25 percent.

Spring 2011

Higher risk weights for consumer loans

Higher risk weights introduced for fast growing consumer loans. For new general purpose loans with maturities below two years, the capital adequacy risk-weight is increased to 150 percent (from 100 percent). For new general purpose loans with a maturity greater than two years, the risk-weight is increased to 200 percent (from 100 percent).

June 2011

Increased provisions for consumer loans

For new (performing) general purpose standard loans (Group 1), general provisions were increased from 1 percent to 4 percent. Specific provisions for closely followed up loans (Group 2) increased from 2 percent to 8 percent. The higher provisioning requirements are for banks having a consumer loan portfolio exceeding 20 percent of total loans or having a general purpose loan NPL greater than 8 percent. If there is a restructuring of the loan allowing maturty extension a minimum of 10 percent provisioning is required.

June 2011

Limits to credit card payments

If three or more monthly payments within a calendar year are less than half of the outstanding balance for the period, the individual credit card limits cannot beincreased and cash advances for such credit cards cannot be permitted, unless the outstanding balance for the period is fully covered.

June 2011

33

Macroprudential Measures (Timeline)

Measure Description Adoption Date

Changes to minimum Capital Adequacy Requirements

Amended by the BRSA in September 2011 to apply to banks with foreign strategic shareholders as of January 2012. The minimum ratio would depend on variousfactors such as the CDS spread of the parent and its sovereign, EBA stress test results and the public debt ratio in the country of origin.

September 2011

Some sectoral measures for provisions

Determining higher provisions by the BRSA taking into account the riskiness of the particular sectors .

September 2012

Differentiation of Tax Rate for Interest Income of Deposits

Amended by cabinet decision (01.01.2013) to differentiate 15 % tax rate taken from interest income of deposits according to maturity of the deposit. New tax rates are as follows: In TL deposits rates are 15% for 6 months, 12% for 6 - 12 months and 10% for more than one year. In FX deposits rates are 18% for 6 months, 15% for 6 - 12 months and 13% for more than one year.

January 2013

Differentiation of Resource Utilization Fund Rates

Amended by cabinet decision (01.01.2013) to differentiate resource utilization fund rate taken from credit users. New rates are as follows: 3% for loans given for less than one year, 1% for loans given for 1 - 2 years (before it was 0%), 0,5% for loans given for 2 - 3 years (before it was 0%) and 0% for loans given for more than 3 years.

January 2013

Withdrawal from a time deposit account before maturity

Depositors can withdraw half of their time deposits at most two times without losing interest income if maturity of their account is one year and longer. For cumulative deposit account, the same process is valid if half of the amount is withdrawn at most three times.

January 2013

Leverage, capital buffers, capitaladequecy

BRSA has issued the several regulations within the framework of the harmonization process for Basel III on leverage, capital Conservation and countercyclical capital buffers

January 2014

Measures on credit card usageand consumer loans

The scope of the incremental provision ratios increased for consumer loans. Risk weights of receivables from credit cards and long-term automobile loans that were

used in calculating capital adequacy ratios were increased. The minimum payment ratio for credit cards increased, card limits reduced for the first time users and lower income group.

January 2014

34