Turkish Central Bank tightens FX-protected deposits reserve ratio

Turkish Central Bank has escalated the compulsory reserve ratio for FX-protected deposits (KKM) from 15% to 25%, the bank announced in the official gazette of Turkey on Thursday, adding to a series of measures aimed at scaling back the widely controversial lira-protection scheme.

The change differentiates the compulsory reserve ratios based on the maturity period of the KKM accounts. For deposits with a maturity of up to 6 months, the reserve requirement ratio has been increased by 10 points, bringing it up to 25%. This move is aimed to encourage a transition to Turkish Lira (TL) denominated deposits. For deposits with a maturity period of up to 1 year, and those exceeding a year, the compulsory reserve ratio is established at 5%.

Previously, the obligation to establish a compulsory reserve for KKM accounts was a uniform 15% across all maturity periods. This alteration is expected to lead to a withdrawal of approximately 300 billion TL of excess liquidity from the market, aligning with the broader effort to continue retracting the surplus Turkish Lira liquidity from the system. Furthermore, this strategy aims to promote longer maturities in KKM accounts.

The KKM scheme, initially introduced by President Tayyip Erdogan's administration in late 2021, was intended to arrest the freefall of the Turkish lira against major foreign currencies. However, the program had mushroomed in scale, with KKM accounts ballooning to an astounding $117 billion or approximately 3.1 trillion lira, equivalent to around 25% of the total bank deposits. This rapid expansion was fueled by the dramatic 68% plunge of the lira over the course of the past two years.

With this compulsory reserve increment, the Central Bank intends to make the transition from KKM accounts to TL deposits more incentivizing for banks, promoting a more stable financial ecosystem.

In an attempt to mitigate the financial ramifications of the KKM scheme, the central bank had reportedly disbursed an estimated 300 billion lira (equivalent to $11 billion) in the months of June and July alone, with additional costs projected to reach 350 billion lira for the current month.