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

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-PRUDENTIAL POLICIES: RULE-BASED VS. DISCRETIONARY 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

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

MACROPRUDENTIAL POLICY FRAMEWORK IN TURKEY 11

Policy Framework 12 Price Stability Financial Stability Policy Rate Structural Tools Cylical Tools

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.

Leverage Based Reserve Requirements 16

Reserve Option Mechanism FX ROM Utilization Ratio (Percent) Gold ROM Utilization Ratio (Percent) 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 Signal Last observation: QE2 Eurozone 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 DID WE DO SO FAR? 23

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

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 Çetinkaya Deputy Governor November 7, 2013 Istanbul