Turkish Banks tumble as Central Bank Starts unwinding risky FX deposit program

Turkish Banks tumble as Central Bank Starts unwinding risky FX deposit program
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Lira lifeline program faces rollback in push for more lira savings.

Turkish lenders tumbled in Monday trading after the central bank took its first steps to curb a tool supporting the lira, according to Bloomberg.

The Borsa Istanbul Banks Index fell more than 5% as Akbank, Yapi Kredi Bankasi shares, and Turkiye Is Bankasi all fell sharply. The lira fell 0.2% against the dollar.

In a weekend regulation, the central bank moved to reduce reliance on foreign-exchange-linked deposits and push banks to convert more savings into lira accounts. Banks that fail to meet conversion targets will be forced to buy additional government bonds.

The bank also raised reserve requirements on short-term foreign currency deposits, forcing banks to park more FX reserves with the regulator.

Analysts say the decisions will likely raise lira deposit rates to make them more attractive while lowering rates on FX-protected lira deposits. The ultimate aim is to boost lira savings and reduce demand for foreign currency.

However, the rollback of the FX support program introduced in late 2021 could create headwinds for major Turkish banks. The lira lifeline has become a $124 billion gamble that haunts the financial sector.

As the central bank cautiously unwinds the program, banks are bracing for the fallout. Their share prices plunged Monday, signaling that investors expect borrowing costs to rise along with risk exposure.

Despite the potential turmoil, the moves are inching Turkey away from its unorthodox economic experiment to stave off a currency crisis. With inflation still near 80%, the central bank is caught between supporting the lira and reassuring markets. Its delicate balancing act continues.