Lira swaps to wean banks off foreign funding
8/14/2019 2:37:47 PM
The long-term currency swap auctions will serve as an additional source of lira liquidity for banks.

A Turkish central-bank swap facility launched last week is designed to reduce the banking system’s reliance on foreign markets, reported Bloomberg.

Currently, Turkish lenders have to tap foreign investors to help bridge a mismatch between their hard-currency liabilities and lira assets.

Turkey’s banking system is plagued by a low savings rate, and more than half of total deposits at local lenders are held in foreign currency. To finance loans that are mostly issued in lira, banks often have to exchange their foreign-currency holdings in the so-called offshore currency swap market, where interest rates are not always favourable.

The central bank swap transactions—local lenders place foreign-currency with the monetary authority in exchange for lira funding—will also boost the country’s foreign currency reserves. The latest central bank data show net reserves stood at $32.1 billion after slumping below $25 billion in May.

Türkiye Cumhuriyet Merkez Bankası (TCMB) said it will start offering banks one, three and six-month currency swaps, extending a facility launched earlier this year into longer maturities. So far, the monetary authority has offered $2.75 billion of one- and three-month swaps and priced the contracts in line with market rates.

Still, there is a lingering concern that TCMB will use the facility to inject cheaper liquidity into the system by providing money at a discount as it looks to prop up the economy. Last month, the central bank slashed the benchmark policy rate by 425 basis points, the most on record.