Turkey: Turkey Strengthens Bank Liquidity Rules To Increase Resilience During Short-Term Systemic Shocks

Recent development

On August 20, 2015, the Banking Regulation and Supervision Authority (the "BRSA") updated the Regulation on Liquidity Coverage Ratios, clarifying the rules for calculating liquidity coverage ratios of banks in Turkey.

Background and liquidity coverage ratio basics

In line with Basel III standards, on March 21, 2014, the BRSA introduced liquidity coverage ratios ("LSR") in the Turkish banking sector to ensure that banks have sufficient high-quality liquid assets ("HQLA") to survive a significant, unexpected cash outflow for up to 30 days. The LSR is a ratio of HQLA to total net cash outflows over a 30-day stress period – i.e., total expected cash outflows less total expected cash inflows subject to a cap of 75% of total expected cash flows.

HQLAs are typically unencumbered assets (i.e., not pledged, secured or collateralized) that can be converted immediately into cash in private markets. These assets are classified in one of three categories (Level 1, 2A and 2B assets), depending on their liquidity. Total net cash outflows are based on the run-off and inflow rates the BRSA sets for different assets.

The minimum LSR is 100% for Turkish lira liquidity and 80% for foreign exchange liquidity.

What the BRSA did

  • The BRSA clarified the "active and sizeable market requirement" for HQLA. The market must have a low concentration demonstrated by low bid-ask spreads, high trading volumes, and a large and diverse number of market participants in accordance with Basel III.  
  • To qualify as HQLA, a discount rate floor of 10% for Level 2A assets, 20% for Level 2B non‑security assets, and 40% for Level 2B securities have been set, based on the assets' previous performance or the performance of similar assets from the issuer during previous 30-day liquidity shocks. Assets that have no performance data or fail to satisfy these requirements are not included in the HQLA. As before, Level 1 assets are not subject to a discount rate floor.  
  • Surplus assets of parent bank subsidiaries or branches located abroad that satisfy the LSR at the subsidiary or branch level can be included in the bank's consolidated LSR. If, however, these assets cannot be transferred to the parent bank, subsidiary and branch surplus assets cannot be included in the parent bank's LSR.  
  • Level 1 assets now include a bank's accounts and reserves at a central bank, and overnight lending through central banks. Previously, only accounts and reserves at the Turkish Central Bank could be considered.  
  • Level 2B assets now include sovereign and central bank debt instruments with a risk weight of 50%.  
  • The criteria for retail deposits (real persons' deposits) and unsecured wholesale funding extended to retail customers (i.e., small and medium enterprises with low bank debt) have been clarified. Now, to be classified as a stable deposit or fund, the customer must (i) have a deposit or participation fund account open for at least 12 months; (ii) have a loan with an unspecified maturity or without a maturity; (iii) have a loan with a maturity of over 12 months; or (iv) be actively using another bank product. The stable deposit or fund satisfying one of these criteria is subject to a 5% run-off rate compared to 10% for less stable deposits or funds.  
  • If a customer has a deposit or participation fund account active for over 12 months, the deposits qualify as operational deposits generated by clearing, custody and cash management activities subject to a lower run-off rate.  
  • If a country where the parent bank's subsidiaries or branches carry out their activities sets higher run-off rates for retail deposits and wholesale funding extended to retail customers, the BRSA will consider the higher rates in calculating the consolidated LSR.  
  • To avoid currency mismatch, a bank cannot (i) include foreign exchange-secured funding transactions backed by Turkish lira in a foreign exchange LSR, either as expected cash outflow or inflow; and (ii) include excess liquidity arising from netting in derivative transactions dominated in foreign exchange if it includes a Turkish lira payment.  
  • Options that have a maturity of less than 30 days, or can be exercised before their maturity, are counted when they are in the money (i.e., for call options when the exercise price is below the market price of the underlying asset). This can cause inflow or outflow for a bank depending on the bank's position in an option.  
  • Off-balance sheet liabilities are now classified in two groups with different run-off rates, depending on the counterparty: (i) non-cancellable and conditionally cancelable liabilities, and (ii) unconditionally cancelable liabilities. The BRSA defines non-cancellable and conditionally cancelable liabilities as (i) bank commitments to pay customer debts to financial markets, and (ii) other bank guarantees, sureties and undertakings provided to customers.  
  • The BRSA includes collateral swaps under expected cash inflows.

Conclusion

The BRSA has demonstrated its commitment to a robust and resilient Turkish banking sector by issuing further guidelines to comply with and exceed Basel III requirements. The BRSA's clarification of how the regulation will be implemented creates a more concise regulatory environment for newly enacted liquidity measures to protect against market liquidity shocks. Banks' liquidity policies will determine how these amendments affect their LSRs.

Please contact us if you have questions about how these changes might affect your company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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