Macroprudential Policies : Turkish Experience

1. Macroprudential Policies : Turkish Experience Murat Çetinkaya Deputy Governor November 7, 2013 Istanbul

2. Contents • Macro-prudential Policies : Rule-Based vs. Discretionary • Macroprudential Policy Framework in Turkey • Turkey: How did we do so far? • Conclusion

3. Macro-prudentialPolicIES:RULE-BASED vs. discretionary

4. «Systemic Risk» • Post-Lehmanchallenge : Re-orientingprudentialregulationtowardscontaining «systemic risk» «We will amend our regulatory systems to ensure authorities are able to identify and take account ofmacro-prudential risks across the financial system” G - 20 Declaration on Strengthening the FinancialSystem, 2 April 2009

5. Macro-prudential Policy Aim at addressingsystemic risk withwaysto : • Measureandassessaccumulation of risk (system –wide) • Avoidboom –bustcycles (in supply of creditandliquidity) • Handlerisksrelatedwithinterconnectedness (spill-over)

6. Macro-prudential Policy Twodimensions : • Cross-sectionaldimension : Risk distribution at a point in time (acrosssectors/agents) • Time dimension : Evolution of aggregate risk in thesystem

7. Macro-prudential Policy Theframeworkshouldaimtoachieve : • Transparency • Accountability • Predictability

8. 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 Source: IMF Staff Analysis

9. 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 Source: IMF Staff Analysis

10. Rules vs. Discretion • Rule-based or discretionary macroprudential policy? A rule-based counter-cyclical framework with «constrained discretion» at turbulent times.

11. Macroprudential PolicyFrameworkin Turkey

12. Policy Framework

13. Structural Tools by CBRT • Maturity Based ReserveRequirements • CurrencyBased Reserve Requirements • Leverage Based ReserveRequirements • Reserve OptionsMechanism

14. Maturity Based Reserve Requirements

15. Currency Based Reserve Requirements FX Reserve Requirements TL Reserve Requirements Source: CBRT. Source: CBRT.

16. Leverage Based Reserve Requirements

17. Reserve Option Mechanism Gold ROM UtilizationRatio (Percent) FX ROM UtilizationRatio(Percent) Source: CBRT. Source: CBRT.

18. Cylical Tools by CBRT • Policy Rate • Interest Rate Corridor • TL Liquidity Management • FX Liquidity Management

19. Liquidity Policy Interest Rate Corridor and Average Funding Rate (Percent) QE3 Eurozone Debt Crisis QE2 Lehman Crisis Source: BIST, CBRT. *TS: Tapering Signal Last observation: 30.10.2013

20. Liquidity Management CBRT Funding (Billion TRY) Source: CBRT

21. Macroprudential Measures by BRSA • Levy on Consumer Loans • Loan-to-Value Restrictions • Risk Weight on Consumer Loans • General Provisioning Requirements

22. Recent Policy Actions • With the amendments on 8 October 2013, newregulationshavebeendeclaredwithregardstobothcorporateandretailloans. • Amendmentsmade in retailloansrelatedto : • Credit Card Limits • Minimum Payment Ratios • Risk Weights in CAR A newtool in MP policy:Loan-to-Income Ratio

23. Turkey: How didwe do so far?

24. Rebalancing: Current Account Current Account Deficit(12-Month Rolling, Billion USD) Macroprudential Tightening +Monetary Easing Macroprudential Tightening Monetary Tightening Monetary Tightening Source: CBRT.

25. Rebalancing: Credit Growth Total Loan*Growth Rates (YoYChange, Percent) Source: BRSA. *Total credit is inclusive of all types of banks (deposit banks, participation banks, and development/investment banks) and credit cards.

26. Quality of Capital Inflows Main Sources of Current Account Deficit Finance(12-Month Cumulative, Billion USD) Source: CBRT. *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.

27. Maturity of Deposits WeightedAverage(Days) Source: CBRT. Last observation: 25 October 2013

28. CBRT International Reserves Composition of Reserves(Billion USD) Source: CBRT. Last observation: 25 October 2013

29. Exchange Rate Volatility SelectedEMEs(Percent, Next 12 monthsimpliedvolatility) Source: Bloomberg, CBRT. EMEs: Brazil, S.Africa, Indonesia, India, Turkey.

30. CONCLUSION

31. Conclusion • A rule-basedapproachwithconstraineddiscretion at certainphases of cyclesseemsto be thebestapproach in conducting macroprudential policies. • Theimplementation of macroprudential policiesyieldpre-commitmentandcredibility as well as dynamismandflexibilitytothepolicy-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.

32. Conclusion • Macroprudentialpoliciesaim at improvingtheresilience of thefinancialsystem. Theyshould be supportedwithstructuralreforms. • 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.

33. Macroprudential Policies : Turkish Experience Murat Çetinkaya Deputy Governor November 7, 2013 Istanbul