The treasury has barred two more small banks from operating as pressures mount from the foreign exchange crisis and tougher central bank rules on reserves and liquidity. However, the treasury says no more of Turkey’s 70 banks are having difficulty meeting lira or foreign exchange obligations.
The treasury prohibited the Marmara Bank and Turkish Import & Export Bank (IMPEX) from further trading on 21 and 24 April, respectively. These closures followed the shut-down of TYT Bank on 11 April (MEED 15:4:94).
The rule changes, retroactive to 31 March, encourage the banks to seek more lira liquidity, close exposed short positions in foreign exchange, and sell more foreign currency to the central bank. The authorities thereby hope to dampen the demand for foreign exchange fuelling the crisis.
The foreign exchange crisis, and TYT’s closure, panicked some depositors at small banks into transferring their accounts to larger banks. This gathered pace during the week ending 22 April, according to Istanbul banking sources. Despite the treasury’s assurances, other banks could find themselves in severe difficulties, banking sources say.
Smaller institutions dealing mainly in foreign exchange transactions and capital market operations are most at risk from the foreign exchange crisis. The latter activities provided much of the banking system’s profits in 1993. But this was at the cost of large, exposed short foreign exchange positions, and sizable portfolios of government paper. Fixed-rate government paper became unprofitable when the treasury started to raise its borrowing rates as the foreign exchange crisis deepened. Lira depreciation of around 36 per cent on short foreign exchange positions has cost the banking system an estimated $800 million since the crisis broke in mid-January, according to banking sources.
Flows of funds through the interbank markets to the smaller banks have dried up, because nervous banks will not lend to each other. Before its closure, Marmara Bank was reportedly offering 500 per cent in the overnight interbank markets. This compared with rates from other institutions ranging from 80-300 per cent. The large state banks have placed their funds abroad instead, at or below cost, according to banking sources. The smaller institutions with relatively tiny branch networks have also been squeezed by the large retail institutions in an interest race for short-term, one-to-three month deposits with rates of up to 140 per cent annualised.
Other banks at risk may be saved by a clause added to a new law aimed at making the central bank more autonomous. The clause enables the central bank to extend credits to institutions faced with sudden withdrawals in times of financial turmoil. The law was passed by parliament on 24 April.
But the government has yet to introduce a replacement for a blocked decree giving the treasury stronger powers of intervention against institutions threatened with insolvency. The measure expires on 22 June (MEED 10:12:93). The decree aims to align the Turkish sector with the EU’s second banking directive.