This Selected Issues paper on Turkey discusses the new monetary framework adopted by the Central Bank of Republic of Turkey (CBRT). Instead of relying on one interest rate as inflation-targeting, the CBRT resorted to raising it as inflation pressures intensify and lowering it as they abate. The first version of the framework does not seem to have achieved significant reduction in external and internal imbalances, but the second version of the framework has witnessed an unwinding of imbalances.


This Selected Issues paper on Turkey discusses the new monetary framework adopted by the Central Bank of Republic of Turkey (CBRT). Instead of relying on one interest rate as inflation-targeting, the CBRT resorted to raising it as inflation pressures intensify and lowering it as they abate. The first version of the framework does not seem to have achieved significant reduction in external and internal imbalances, but the second version of the framework has witnessed an unwinding of imbalances.

III. Macroprudential Framework and Policies in Turkey1

Turkey’s economy has long been subject to boom-bust cycles linked to capital flows. And while the Turkish banking system continues to perform well, it faces some structural vulnerabilities that can pose financial stability risks. In common with peer countries, Turkey has been developing and implementing a macroprudential policy (MPP) framework, which has had some success in mitigating financial stability concerns. Looking ahead, Turkey’s macro-prudential and micro-prudential tool kit should be expanded and used in a more targeted and active manner to ensure financial stability, with a focus on debt-to-income limits on households, steps to constrain unhedged foreign exchange borrowing, and more active use of steps to limit growth in very fast-growing credit segments.

A. Background

1. Turkey’s economy has long been subject to boom-bust cycles linked to capital flows. Reflecting in part low domestic savings, Turkey remains heavily dependent on foreign capital, contributing to large real sector volatility. Turkey’s gross external financing needs are large, representing roughly a quarter of GDP on an annual basis. The dependence on foreign capital means that when capital inflows slow, economic activity slows sharply, leading at times to hard landings. This in turn can pose risks for financial stability, and underscores the importance of ensuring a sound macroprudential framework

2. The Turkish banking system continues to perform well, although vulnerabilities remain. Relative to peers, banks’ profitability remains high; leverage and the level of non-performing loans are low; and capital buffers are strong. Banks have been comfortably rolling over external borrowing notwithstanding the volatile external backdrop, and the banking system short FX position has recently declined. However, the increased dependence of banks on short-term foreign borrowing (over 60 percent of overall bank external funding) represents a rollover risk. In addition, the banking sector loan-to-deposit ratio has surpassed 100 percent from 70 percent a few years ago, and consumer indebtedness relative to disposable income, while lower than in many other developed countries, has risen to 50 percent in the recent credit boom. Corporates are exposed to direct foreign exchange risk with its short FX position totaling $128 billion (see figure panel 1 for an overview of banking sector indicators).

B. MPP Framework and Literature

The objectives and design of an MPP framework

3. A well-articulated MPP framework is crucial to achieve more effective crisis prevention. The 2007/8 crisis underscored the need for countries to develop a strong policy framework to address macro-financial systemic risks including enhanced prudential regulation, intensified supervision and introduction of new MPP instruments. The MPP framework should enable the authorities to identify the main sources of systemic risk, develop a well-focused policy agenda to mitigate these risks, and provide clarity as to which authorities are responsible and accountability for crisis prevention, ensure a high degree of accountability and willingness to act as well as mutually supportive policies among the relevant agencies while preserving the operational autonomy of established policy fields (see IMF, 2011 and Nier et al, 2011). In addition, the first line of defense for maintaining systemic financial stability should be robust micro-prudential supervision and regulation.

4. Macroprudential instruments are typically introduced with the objective of reducing systemic risk, either over time or across institutions and markets (Lim et al, 2011). Countries use a variety of tools, including credit-related, liquidity-related, and capital-related measures to address such risks, and the choice of instruments often depends on countries’ degree of economic and financial development, exchange rate regime, and vulnerability to certain shocks. Countries often implement these instruments in combination rather than singly, use them to complement other macroeconomic policies, and adjust them countercyclically so that they act in much the same way as “automatic stabilizers.”

5. Cross-country research by Lim et al, 2011) demonstrates that some targeted risk variables show a change of course after macroprudential instruments are introduced. An examination of the performance of the target risk variables during the periods before and after the implementation of a macroprudential instrument indicates that a number of them may have had the intended effect. Some credit-related instruments—e.g., caps on loan-to-value, caps on debt-to-income, dynamic provisioning, and reserve requirements (RR)—seem to have an impact on credit growth. The paper also finds that to address systemic liquidity risk, instruments such as limits on liquidity mismatch may be used, or limits on the net foreign currency position if the liquidity risk stems from foreign currency funding. To address risks arising from excessive leverage, capital-related instruments may be a good choice. These measures provide a buffer that can be made countercyclical through adjustments in the capital requirement, the risk weights of assets or provisioning requirements, and can thus help curtail excessive growth in leverage. If risks arise due to capital flows, all three types of instruments can be used.

Country experience

6. Turkey’s peer countries have used a similar range of MPP tools to deal with their financial stability concerns, with some also resorting to capital flow measures (CFMs; see Lim et al 2011).

  • Brazil: In order to reduce credit growth and curb speculative inflows, Brazil increased RR in 2010 and also introduced a 60 percent unremunerated reserve requirement on banks’ short foreign exchange positions in the spot market. The central bank also increased capital requirements for some consumer loan operations with long maturities and high LTV ratios (including car loans) (2010). In October 2009, it also re-imposed CFMs via the IOF on foreign purchases of bonds and equities and extended to foreign borrowings (March 2011).

  • Korea: To slow housing market booms, Korea extensively used LTVs and DTIs (which were adjusted according to house price fluctuations) while it also utilized RRs and is currently phasing in a reduction in the loan-to-deposit ratio to 100 percent. During 2009-2011, Korea used a number to measures to reduce the build-up of short-term external debt. For example, it introduced a ceiling on banks’ FX forward positions in 2010 while limits were set on FX loans. FX liquidity standards were tightened in 2009 while banks were subject to a macroprudential levy on their non-deposit FX liabilities in 2011. As a CFM, a withholding tax on foreign purchases on treasury and money stabilization bonds was re-introduced.

  • Poland: Poland, which faced a credit boom during 2006-2008 and then FX liquidity concerns during the crisis period, aimed to mitigate household credit and FX risks while improving banks’ capital and liquidity buffers. From 2010, scenario-based DTIs to households were introduced which were stricter for FX loans. Poland also amended the risk weights on Polish zloty and FX loans while restrictions were imposed on profit distributions in 2009.

C. Turkey’s MPP Measures and Framework

7. Turkey has made active use of MPP measures, notably since the Lehman crisis, to safeguard the domestic financial sector (Annex 1). In October 2008, banks dividend payouts were sharply curtailed to bolster bank retained earnings and capital. In January 2009, the BRSA loosened FX liquidity requirements while restructured loans were reclassified from ‘overdue’ to ‘performing’ under certain conditions.2 Banks were also prohibited, starting in June 2009, from lending in FX (or FX-indexed loans) to consumers while from March 2010 onwards banks temporally lowered their new general provisioning rate for cash loans. Although the IMF recommended an earlier termination of regulatory forbearance measures, the phase-out only occurred in March 2011 when the credit boom was well underway.

8. From 2010, a credit boom took off in Turkey, for which the authorities then resorted to additional MPP instruments, albeit with a delay (Annex 2). Initially, the steps were taken primarily by the CBRT, which relied—starting in late 2010—on successive increases in RRs to temper loan growth. However, this measure proved largely ineffective as the CBRT offset the higher RR by injecting additional liquidity via open-market operations. The authorities also used moral suasion to target a uniform 25 percent increase on banks’ annual loan growth for 2011, adjusted for exchange rate movements, which appeared to have become binding for some banks by mid 2011. More importantly, starting in June 2011,3 the BRSA—motivated by macroprudential concerns—increased risk weights for new general purpose (consumer) loans and raised general provisioning requirements for banks with high levels of consumer loans or non-performing consumer loans. These June 2011 measures, together with the implicit nominal credit growth target and the worsening external market conditions, contributed to the sharp slow-down in credit growth in the second half of 2011. The BRSA also limited credit card payments in July 2011, and augmented minimum capital requirements for banks with strategic foreign shareholders (effective January 2012).

9. The recent improvements in Turkey’s MPP framework have drawn on recommendations of the 2011 FSAP update. In addition to the steps cited above, in June 2011 a new Financial Stability Committee (FSC) was created by a decree law. The FSC is chaired by the Minister in charge of Treasury—currently the Deputy Prime Minister—and also comprising Treasury, the BRSA, the Capital Markets Board (CMB), the CBRT and the Savings Deposit Insurance Fund (SDIF).

10. Following the FSAP, the CBRT in October 2011 introduced a new RR framework whereby banks have been progressively allowed to meet TL RR by posting FX and gold. The share of TL RR that can be met by using FX been steadily raised, and banks are now able to use up to 60 percent of TL required reserves with FX and 30 percent with gold. In addition, the CBRT is now applying a varying “Reserve Option Coefficient (ROC)” that requires a higher equivalent amount of FX or gold to meet a given portion of TL RR.4 Given the large opportunity cost difference between banks’ TL and FX funding, banks’ participation has been over 90 percent of the maximum allowable amount. The CBRT aims to use this fine-tuning ROC tool for capital flows and financial stability purposes. In principle, this tool will absorb FX inflows, while increasing banks’ FX liquidity buffers and the CBRT’s gross reserves.

11. A 2010 IMF survey showed that Turkey’s use of MPP instruments has been broadly in line with other EMs, with some exceptions (see Lim et al, 2011 and Annex 3). At that time, Turkey’s main MPP instruments were caps on LTVs, prohibition on FX lending to households, net open FX limits and restrictions on profit distributions, all instruments that have been utilized by other EMs to varying degrees. Turkey’s frequent use of RRs from the end of 2010 and especially in 2011 was not captured in the 2010 survey, but many EMs likewise appear to have made intense use of such RR MPP instruments. It is interesting that only a few EMs used caps on FX lending and profit distributions restrictions, instruments that have been important for Turkish banks. Unlike Turkey, many EMs have utilized DTI limits as well as countercyclical capital and dynamic provisioning MPP instruments. As of today, Turkey does not have a formal DTI limit, and provisioning requirements only embedded some countercyclical element when provisioning requirements for consumer loans were raised in June 2011. Turkey’s tight limitations on dividend payouts to build up capital buffers could be seen as having a similar impact as the countercyclical capital MPP instrument other EMs have utilized.

D. Expanding the Tool Kit

12. The 2011 FSAP update made a number of recommendations to strengthen the organizational aspects of its MPP framework. It was suggested to increase emphasis on communication to help ensure accountability for macroprudential policy. Consideration could be also given to establishing more clearly distinct arrangements for crisis prevention (macroprudential policy) and crisis management. In addition, a leading role of the CBRT on the macroprudential committee is useful to harness the central bank’s expertise in risk assessment and its incentives to maintain financial stability. The FSAP also suggested enhancing interagency coordination while maintaining operational autonomy of the participating agencies.

13. Looking forward, the authorities could consider implementing in a pre-emptive and targeted manner a wider set of MPP instruments to ensure financial stability. In particular, macro-prudential and micro-prudential policy measures could be considered to maintain systemic financial stability by preempting surges in credit, discouraging banks from funding their loan activities via increased short-term FX borrowing, and limiting unhedged FX borrowing by the corporate sector. A more countercyclical and targeted macro-prudential policy approach would also complement fiscal and monetary policy, which, respectively, have been underutilized and overburdened. The sequencing and calibration of any new measures will need care, so as to avoid unintended deleveraging. While it is not advocated that all the below measures be swiftly implemented, the authorities could consider the application of such macro-prudential and micro-prudential policies should the above-mentioned broad areas of risks and financial stability become a policy concern. In particular, safeguarding systemic financial stability also requires robust micro-prudential regulation and supervision.

14. Existing capital buffers will have to be conserved. The BRSA has fully implemented Basel II as of June 2012, which also includes Basel II.5 provisions (CRD III),5 and would be ready for Basel III implementation from the beginning of 2013.6 Turkish banks have maintained a comfortable capital adequacy ratio of 16.3 percent (which dropped by only 0.2 percentage points from implementation of Basel II) and tier 1 capital at 14.1 percent (both above peer countries). It would be important to phase-in Basel III (capital, liquidity and leverage rules) according to the agreed schedule, or even on an accelerated basis given that results of quantitative impact studies (QIS) have been promising so far, especially compared with peer countries. For instance, banking sector leverage remained strong with around 8 percent (Basel III definition). Turkey’s minimum capital target of 12 percent as well as tight dividend payout rules are useful micro-prudential measures in an environment of strong credit growth, since capital buffers can erode quickly when banks expand their balance sheets towards higher risk-weighted loans.

15. While the Turkish banking sector has been comfortably rolling over external funding during the global financial crisis, it faces some structural FX funding challenges that could be addressed with macro-prudential and micro-prudential measures. Although direct parent funding is low, Turkish banks are vulnerable to a capital flow reversal. The banking sector loan-to-deposit ratio has risen above 100 percent from 70 percent a few years ago, and while deposits constitute the bulk of bank liabilities, the share of wholesale and foreign currency funding has increased sizably over the last two years.7 To counter such increasing structural funding maturity and FX mismatches, the BRSA could introduce minimum FX liquidity ratios at the 3-month and longer horizons to extend funding duration. The authorities could also phase in the Basel III liquidity rules according to the agreed schedule or even accelerated, given promising QIS results, once a Basel agreement on the final rules has been reached. As in the existing liquidity regulation framework in Turkey, the Basel III liquidity rules could be separated by currencies. In addition, the targeted application of FX RR increases at shorter maturities as a MPP measure could also slow down banks’ short-term external borrowing in case of excessive FX mismatches.8 As with all RR increases, the aim is to increase the spread between loan and deposit rates and thus help to lower loan growth.9 The experience of other peer countries that had to deal with excessive FX funding could be also useful. For instance, Korea had adopted a number of quantity MPP measures such as a move to a 100 percent loan-to-deposit ratio, a ceiling on banks’ FX forward positions, limits on FX loans or a levy on non-deposit FX liabilities.

16. Additional steps to limit unhedged FX borrowing by the corporate sector may be warranted. While households are long FX, with almost no FX liabilities, non-financial corporates are exposed with a short FX position totaling $126 billion. FX corporate loans comprise around 26 percent of banks’ total loan portfolio and 40 percent of corporate loans. Banks usually do not lend in FX to the smaller SMEs, and require corporates to have FX export income or collateral. Moreover, additional buffers include FX corporate assets and personal FX accounts of corporate owners, both held abroad (but for which little data is available). Nonetheless, the short FX position of the corporate sector does pose a risk to financial stability, both because of any remaining unhedged corporate exposures, and via a rapid deterioration in banks’ asset quality in the event of a depreciation. To this end, a draft BRSA regulation on credit risk management should be finalized, as it would improve banks’ risk management and help supervisory examination of banks’ FX lending practices. Little information on corporate FX hedging is available, and this data gap should be filled. Higher risk weights and provisioning on unhedged FX lending to corporates could be introduced if growth in this lending segment were to pick up rapidly, especially amidst a capital inflow surge. Data availability would be an important prior condition for such a measure. It may also be desirable to tighten the conditions under which non-FX earning corporates can borrow FX in Turkey.10 If in a situation of excessive FX borrowing by corporates price-based tools do not succeed in curbing corporates’ appetite for cheap FX loans, quantity-based tools could be useful as well. For instance, Korea introduced limits on FX hedging by corporations relative to their export earnings in June 2010, while India increased restrictions on external borrowing in December 2009 by, for example, introducing interest rate caps on eligible external commercial borrowing.

17. Setting a consumer debt-to-income limit (DTI) across the banking system could sustain household balances’ resilience. Unlike some peer countries, Turkey has not suffered a real estate boom and bust in recent years. Household credit in FX is forbidden (since 2009) while LTV ratios on mortgages have been implemented in December 2010 at a 75 percent ceiling. Banks already apply DTI requirements for their internal risk management and credit scoring, and a debt-to-income ratio exists for credit cards (a limit of two times salary for new cards). But household debt, while still lower than in many other developed countries, has significantly increased to around 50 percent of disposable income during the recent boom phase. As is common in some other peer countries (e.g., Korea, Poland or Russia), the BRSA could introduce a DTI for consumers to prevent any excessive growth in consumer indebtedness relative to disposable income. Data collection on consumer income will need to be improved, however, given that consumer income plays no role in the credit score calculated by the credit bureau KKB.11 While according to Crowe et al (2011), a DTI can limit household leverage, the calibration could be difficult. The measure can be subject to circumvention (e.g., migration of borrowers to the shadow banking system), and might hit poorer families disproportionally. Hence, it will be important for the KKB and banks to have access to reliable consumer income data.

18. Using standard prudential policy and regulation, the authorities should be vigilant against any worsening of credit quality especially given the currently historically low NPL level of 2.8 percent (August 2012). NPL ratios are traditionally backward-looking indicators. Banks have been able to write-off some NPLs by selling them to NPL companies (independent of the banks). If the future loan growth is too strong in particular segments, the BRSA could consider higher risk weights and/ or provisioning in these segments in a pre-emptive and targeted manner (as was done in June 2011 for consumer loans). As in other countries (e.g. Brazil and Korea), LTV ratios could be more extensively used in specific loan categories such as car loans. Given the high penetration of credit cards in Turkey (close to 5 percent of GDP) compared to other countries and the relative size of credit card lending in banks’ loan books (26 percent of retail loans), it would be important to guard against any deterioration in lending standards in this segment or sharp increase in credit card NPLs in a downside scenario. Consumer credit card NPLs peaked during the last crisis at 12.1 percent in October 2009 compared with the current 5.9 percent in August 2012. Data availability and usage on restructured loans by the KKB could be improved especially mapping restructured loans to originating loans in the KKB database.

E. Conclusion

19. Turkey has already successfully implemented a sound MPP framework, and this can be strengthened in specific areas. This note examined the MPP framework in Turkey, with a particular focus on cross-country comparisons and forward-looking pre-emptive and targeted policies the Turkish authorities could implement to maintain systemic financial stability. Following the FSAP, staff emphasized the importance of micro-prudential policies such as application of Basel II and the phase-in of Basel III (capital, liquidity and leverage rules) according to the agreed schedule. Looking forward, the MPP tool kit could be expanded and used in a more targeted and active manner for financial stability. Within a well-articulated macro-prudential framework distinct from crisis management, macroprudential and micro-prudential measures could be considered to maintain systemic financial stability by preempting resurgence of a credit boom, discouraging banks from funding their loan activities via increased short-term FX borrowing and limit unhedged FX borrowing by the corporate sector.

Figure 1.
Figure 1.

Turkey: Financial and Corporate Sectors

Citation: IMF Staff Country Reports 2012, 339; 10.5089/9781475586572.002.A003

Source: Haver; CBRT; BRSA.


  • Crowe, C., G. Dell'Ariccia, D. Igan, and P. RabanalPolicies for Macrofinancial Stability: Options to Deal with Real Estate Booms,” IMF Staff Discussion Note 11/02.

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  • International Monetary Fund (2011) “Macroprudential Policy: An Organizing Framework”.

  • Nier et al (2011), “Institutional Models for Macroprudential Policy, IMF Staff Discussion Note 11/18.

  • C. Lim, C., F. Columba, A. Costa, P. Kongsamut, A. Otani, M. Saiyid, T. Wezel, and X. Wu (2011) “Macroprudential Policy: What Instruments and How to Use Them? Lessons from Country Experiences,” IMF Working Paper 11/238.

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Annex 1. Main Crisis-Related Measures in 2008/2009

article image
Source: Turkish authorities; and IMF staff1/ However, in some banks, up to 20 percent of loans benefited from restructuring.

Annex 2. Recent Macroprudential Measures

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Source: Turkish authorities; and IMF staff.

Annex 3. MPP Instruments and Intensity of Use

Source: Lim et al (2011).Note: No color represents no use of instruments, and ‘1’ denotes the use of a single instrument. For each of the following attributes, i.e., multiple, targeted, time-varying, discretionary and used in coordination with other policies, the value of ‘1’ is added.

Prepared by Heiko Hesse (MCM).


NPLs peaked in October 2009 at 5.4 percent for all loans and 12.1 percent for consumer credit cards. NPLs would likely have been 1–1.5 percentage points higher at their peak in the absence of the forbearance measures related to loan classifications.


The BRSA had taken some steps when it introduced de jure loan-to-value limits on real estate loans in December 2010.


For instance, for the increment from 55 to 60 percent of the TL RR that can be satisfied with FX, the ROC is 2.3 versus 1.4 for the 0-40 percent TL RR bucket.


The negative impact on capital was marginal with 0.2 percent, mainly driven by the zero risk weight on FX RR held with the CBRT.


The BRSA is focusing on compliance with the EU rules CRDIV. It plans to finish drafts of the Basel III regulation by end 2012. Given that over 90 percent of capital buffers are core tier 1 capital, the BRSA argued that it would not need a long Basel III phase-in period.


In June 2012, external borrowing represented about 15 percent of the overall banks’ liabilities with 62 percent of the $106bn external bank debt maturing in less than a year. The majority of this external borrowing comes in the form of loans (43 percent), followed by repos, deposits, and syndicated loans (about 15 percent each).


In addition, in case the CBRT FX RR framework encourages banks to borrow short-term FX; this should be discouraged.


Given banks are increasingly using the CBRT FX RR framework for transforming their FX into TL funding for loans, the cross-currency swap market volume has been also somewhat impacted. Hence, explicitly putting a relative quantity cap on banks’ ability to access the cross-currency swap market is not needed at this current juncture. Repeated rollovers of funding swaps with a shorter maturity than the duration of assets could expose banks to interest rate risk. Counterparty risk with European banks is less of an issue than underlying swap interest rate or rollover risks. While swap contracts are done on an OTC basis, counterparts typically have credit support annex (CSA) agreements and daily margining between each other to mitigate credit risks.


In line with the 2009 legislative change, the average maturity is at least one year with a minimum credit amount of $5m.


Turkey has two important credit bureaus, the Credit Bureau of Turkey (KKB) and the Credit Registry at the Central Bank. KKB, established in 1995, is a private company owned by 9 major banks in Turkey, and shares information among member banks and consumer finance institutions, leasing and factoring companies. It disseminates information both on individuals and legal entities for credit purposes. As at end 2011, KKB had 102 members. Data contributing members provide both positive and negative data on consumer and commercial credits, which are updated at monthly intervals. KKB preserves credit history up to five years after closure. The Credit Registry at the Central Bank collects and disseminates credit information pertaining to both individuals and firms, from both bank and non-bank credit institutions, such as leasing and factoring firms. By the recent amendment to the Banking Law, a newly established Risk Center will be transferred to TBA Risk Center. It is eventually projected that the Risk Center signs an agreement with KKB for it handle the former activities.