Turkey's central bank hikes forex reserve requirements

Turkey's central bank raised foreign exchange reserve requirement ratios on Saturday, citing the need to support financial stability amid volatility in global markets. With the lira currency trading at record lows against the dollar, the changes are intended to ensure banks and other financial institutions can meet forex liabilities and to encourage them to shift foreign borrowing to longer maturities.
Banks will now be required to keep 18 percent of their foreign currency liabilities of up to a year's maturity on hand to provision for potential losses, an increase from 13 percent. Reserve requirements for similar liabilities of between one and two years' maturity rise to 13 percent from 11 percent.
"With a view to supporting financial stability and by taking into account the latest developments in global markets, the reserve requirement ratios of foreign exchange-denominated liabilities of banks and financing companies are revised in order to encourage the extension of maturities of non-core liabilities," the central bank said in a statement. It also raised the ratio for maturities of between three and five years to 7 percent from 6 percent, but cut reserve requirements for maturities of between two and three years to 8 percent from 11 percent.
Turkey's lira slumped to record lows last month as expectations US interest rates will start to rise sucked money out of emerging markets, prompting a series of moves by the central bank to support the currency. Investors are also worried about the direction of Turkish politics. The increase in forex reserve requirement ratios will add $3.2 billion to forex reserves, the central bank said, adding that the average reserve requirement ratio for forex, which currently stands at 11.7 percent, would rise to 12.8 percent. To compensate for tighter forex liquidity arising from the changes, the bank also tweaked the reserve options mechanism (ROM). It increased the number of tranches in the ROM while leaving unchanged the upper limit which allows banks to hold Turkish lira required reserves in foreign currencies.