From asset ratio to capital increase…

The U.S. Government had provided financial support both to its banking system and the Federal Reserve during the 2008 financial crisis; however, under strict monitoring of the government whether the bankers had been offering the public funds to the right persons. The general managers of all American banks had taken an oath at the Congress while their every step was being watched by the government. In short, the Government had not avoided asking where the money was spent on.

Meanwhile in Turkey, something quite interesting is going on. Turkish government is calling banks to account for their money despite the fact that it didn’t give them any money to begin with. It’s called the asset ratio policy, under which the Government says to banks, “You should have offered more loans according to my calculations. Now, you have to pay a fine for not doing so” Strange indeed, but true… The Government is calling out for the money it never gave.

It can be observed that private banks have sharply reduced their deposit interest rates as a response to the Banking Regulation and Supervision Agency of Turkey’s (BDDK) newly implemented ‘asset ratio’ rule, because, in fact, banks do not want to provide loans, because Public Banks get 50% share from each loan (Turkish Lira denominated) private banks offer. A tremendous amount indeed… Whereas, only two years ago, public banks used to get 38% share from TRY loans sold by private banks.

In our conversation with economist Arda Tunca, he gave me a clearer insight into the situation: As their very first response to this “Asset Ratio” policy, private banks purchased government bonds and bills. This was the only reason behind the sharp decline in benchmark bond yield. However, in order to reduce their deposits and avoid risky loans, private banks have significantly decreased TRY deposit interest rates, eventually causing the deposit-loan mechanism to stop working properly.

“Government’s money is people’s money…”

In the meantime, public banks have surpassed threefold the private banks over the last two weeks in terms of offering TRY denominated loans. The representatives of private banks and non-bank financial institutions constantly repeat that they can’t compete with public banks when it comes to TRY denominated loans. And obviously it came as a bit of a shock just to everyone when we heard that the government was planning to implement a budget increase for public banks as if they didn’t have enough advantages already.

Now, let’s look at different aspects of the situation: Fed’s fast reaction to pandemic was to increase its balance sheet to a record $6.8 trillion. It is estimated that Fed could grow its balance sheet up to $10 trillion by early next year. It is indeed not that irrational to expect some of that money will eventually come to Turkey while the world’s largest central banks keep releasing money to the globe. So, for now, we should know that any new capital investments in public banks will be carried out through our own funds.

Rumour has it that deposits leaving the private banks are on their way to public banks, which means a substantial amount of bank money (deposit money) are going to accounts in Public Banks. What happens if savings are shifted towards Public Banks? Let me tell you what will happen.

Just like private banks can buy securities using their own funds, public banks too can do the same. From this point of view, it could be said that a certain portion of funds needed to increase public banks capital will be generated through the selling of fixed income securities and different types of securities by Turkey’s Sovereign Wealth Fund. And these securities can be purchased also by public banks. In other words, this could be a capital increase through self-financing.

Well, it’s one option among many. Ultimately, public banks belong to the public, hence the citizens. That’s why decision-makers may find it reasonable to let public banks increase their capital using people’s savings.