Lira Swaps to Wean Banks Off Foreign Funding, Official Says

(Bloomberg) -- A Turkish central-bank swap facility launched this week is designed to reduce the banking system’s reliance on foreign markets, according to a senior official with direct knowledge of the matter.

The long-term currency swap auctions will serve as an additional source of lira liquidity for banks, the official said, asking not to be named while discussing policy. Currently, lenders have to tap foreign investors to help bridge a mismatch between their hard-currency liabilities and lira assets.

Turkey’s banking system is plagued by a low savings rate, and more than half of total deposits at local lenders are held in foreign currency. To finance loans that are mostly issued in lira, banks often have to exchange their foreign-currency holdings in the so-called offshore currency swap market, where interest rates are not always favorable.

The central bank swap transactions -- local lenders place foreign-currency with the monetary authority in exchange for lira funding -- will also boost the country’s foreign currency reserves, the official said. The latest central bank data show net reserves stood at $32.1 billion after slumping below $25 billion in May.

The central bank on Monday said it will start offering banks one-, three- and six-month currency swaps, extending a facility launched earlier this year into longer maturities. So far, the monetary authority has offered $2.75 billion of one- and three-month swaps, and priced the contracts in line with market rates.

Still, there’s lingering concern that the central bank will use the facility to inject cheaper liquidity into the system by providing money at a discount as it looks prop up the economy. Last month, the central bank slashed the benchmark policy rate by 425 basis points, the most on record.

To contact the reporter on this story: Asli Kandemir in Istanbul at akandemir@bloomberg.net

To contact the editors responsible for this story: Onur Ant at oant@bloomberg.net, ;Dana El Baltaji at delbaltaji@bloomberg.net, ;David Merritt at dmerritt1@bloomberg.net, Constantine Courcoulas, Marton Eder

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