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22 December 2019

Turkish lira falls as regulator intervenes

The Banking Regulation and Supervision Agency (BDDK) will limit the amount of foreign-exchange swaps, forwards and other derivatives with a maturity of seven days or less to a maximum of 10 per cent of banks’ equity.

Turkish lira/Bloomberg

Turkey is limiting the amount of hard currency local banks can exchange for lira with foreign investors, a move that could benefit the central bank by pushing dollar liquidity into its official reserves, reported Bloomberg.

By restricting the amount of dollars that banks can park with offshore funds, regulators may prompt Turkish banks in need of lira liquidity to tap the monetary authority’s own swap facility instead.

As of October 2019, the outstanding amount of short-term swaps with the central bank stood at $13.8 billion dollars, which the monetary authority reports as part of its foreign-currency holdings.

This latest attempt to wean local lenders away from the so-called offshore swap market may also help deter short-term speculative positioning in the lira. Traditionally, the swap market has been one of the biggest sources of funding for banks in Turkey and a key pool of lira liquidity for foreign investors trading local assets.

Volumes in the offshore market have collapsed since authorities began limiting the lira leg of offshore swap transactions last summer, in a bid to stand in the way of short-sellers after last year’s currency crisis.

In September 2018, the banking regulator capped the amount of liras banks can lend offshore to 25 per cent of the equity.

The Turkish central bank offered lenders a $1 billion three-month swap auction. Short-term swap rates offshore plummeted after the announcement, with the overnight rate falling below four per cent, some 800 basis points below the central bank’s own cost of funding.







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