Turkish bank executives concerned with monetary rules

Turkish bank executives have criticized government policy which forces them to buy government bonds saying that could ultimately destabilize the banking sector, amid government’s plans to secure costs of a big election spending plan ahead of next year’s presidential elections. 

The bankers raised concerns about new monetary rules in a meeting on Monday with Finance Minister Nureddin Nebati warning that their ballooning debt holdings posed long-term risks, Reuters said, citing sources with the knowledge of the matter. 

Recently, Turkish authorities have rolled out a series of rules meant to boost lira holdings and dissuade use of hard currencies, including requiring higher bond holdings to backstop foreign exchange deposits.

Many rules require banks to bulk up on treasuries. The buying has driven down 10-year yields by 1,550 basis points to 10.5%, from a 26% peak this year, slicing borrowing costs for the government's 4.47 trillion-lira ($240 billion) 2023 budget.

During the meeting where Nebati and the BDDK (Banking Regulation and Supervison Agency) aimed to discuss the long-term bond holdings, “the bankers complained for the first time,” one source told Reuters. 

Two other bankers said the executives expressed concerns over longer-term "systemic risks" due to the level of their bond holdings.

Polls show dwindling support for Erdogan's ruling AKP (Justice And Development Party) in a tight contest between him and potential challengers in the coming parliamentary and presidential vote, largely driven by economic strains.

The ruling bloc proposed record spending of 258.4 billion lira on social aid in next year's budget which is currently being debated in the Turkish National Assembly.

The AKP has proposed some energy subsidies and student aid, while Erdogan has promised to hike the minimum wage and wages of civil servants, and to adopt early retirement measures.