## 1turea2023002 ## Source details **Canonical URL:** [1turea2023002](https://www.imf.org/-/media/files/publications/cr/2023/english/1turea2023002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1turea2023002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1turea2023002.pdf.json) --- ### Key recent developments and macrofinancial setting - Türkiye’s bank-dominated financial sector has grown markedly and shown areas of resilience since the last FSAP, including retained access to external financing in volatile times, a shift in lending away from FX, improvements in elements of systemic liquidity management, and establishment of the Insurance and Private Pension Regulation and Supervision Authority (IPRSA). - Macro volatility and outcomes: - Inflation increased to almost 80 percent in mid-2022. - Bank credit growth reached over 60 percent by mid-2022. - FX-protected TL accounts reached 15 percent of total deposits in mid-2022. - Sovereign CDS spreads reached high levels in 2022. - Real economic growth averaged almost 5 percent since the last FSAP, with episodes of strong expansion and sharp slowdowns. - Growth rebounded to more than 11 percent in 2021. - Monetary and fiscal policy actions and distortions: - Late-2021 CBRT policy rate was reduced by 500 basis points despite inflation four times the 5 percent official target. - Demand for dollarized and state-guaranteed FX-protected TL deposits rose alongside adoption of a deeply negative real policy interest rate. ### Financial structure, resilience, and elevated risks - System structure and scale: - Financial assets were 148 percent of GDP in 2021; banks account for 90 percent of these assets. - Banking sector assets expanded nearly four times since the last FSAP; TL assets grew threefold. - Non-bank financial sector accounted for 10 percent of domestic financial sector assets as of 2021Q3: pension funds 3.5 percent, insurance companies 2.4 percent. - Stock market capitalization was 30 percent of GDP at end-2021. - State-owned banks (SOBs) and market structure: - SOBs account for almost half of total loans by deposit-taking institutions (30 percent at the last FSAP). - SOB lending rates averaged around 300 basis points below the rest of the system since the last FSAP. - SOB recapitalizations totaled around 1.8 percent of GDP since 2018. - Key resilience factors: - Loan composition shifted from FX to TL. - Households cannot borrow in FX by regulation. - Wholesale funding, though declining, has historically shown resilience. - Elevated risks and vulnerabilities: - Reported system-wide NPL ratio declined to 2.5 percent at end-May 2022; SOBs’ NPL ratio 1.7 percent. - Stage two loan ratio just below 10 percent; loan restructurings rose to 5.7 percent. - Reported system-wide capital was over 18 percent of risk-weighted assets at end-May 2022; BRSA minimum CAR is 8 percent and target CAR is 12 percent. - FX deposits rose to around 65 percent of total bank deposits in December 2021. - CBRT readily available FX reserves fell to 22 percent of total CBRT gross reserves (at mid-2022) from 80 percent at the last FSAP. - Almost three quarters of CBRT FX liabilities are owed to domestic banks. - Foreign investor holdings of public debt declined from 20 percent in 2017 to 1.6 percent in mid-2022. - Corporate sector ICR around 1.5 on average across all sectors in 2020; tourism sector ICR turned negative in 2020; transportation and real estate ICRs below one. - Mortgage average maturity 5.6 years; mortgages amount to 6 percent of total banking sector loans. - Crypto: Global daily transaction volumes of Tether against TL peaked at US$2.2 billion per day in 2021; total crypto holdings about US$5 billion (0.6 percent of GDP) at end-2021. ### Policy environment, distortions, and authorities’ views - Mosaic of heterodox and idiosyncratic measures employed to: - restrain credit growth and direct it to priority activities, - limit dollarization, - support the exchange rate, and - lower government funding costs. - Assessment of measures: - Many measures work at cross-purposes, create distortions, transfer risks to the government balance sheet, and may mask underlying problems. - Authorities’ views reported: - Recognized macrofinancial volatility and the social role of SOBs; expected credit growth to moderate following policy measures. - Characterized regulatory flexibility as pandemic response and expected banks to remain adequately capitalized given prudent provisioning. - Were sanguine about resilience to FX liquidity risks and adequacy of CBRT reserves. ### Financial stability risks, transmission channels, and interconnections - Major risk channels: - Rapid credit growth, led by less profitable SOBs, has contained reported NPL ratios while requiring repeated SOB capital injections to maintain CARs. - Restructured loans rose; regulatory changes impaired accuracy of supervisory indicators and facilitated loan refinancing on which data is not collected. - FX liquidity risks have risen with deposit dollarization and low CBRT reserves. - Strong nexus between CBRT and banks: banks’ FX assets held at the CBRT were about double CBRT readily available FX gross reserves and gold holdings in mid-2022. - Banks’ holdings of government debt have risen; regulatory changes will force banks to hold larger shares of low-interest sovereign debt. - FATF and integrity: - Financial Action Task Force (FATF) placed Türkiye on its grey list in October 2021. ### Stress testing results (data/policy cut-off 2021Q4) - Coverage: - ST covered the 10 largest banks (four state-owned), ≈80 percent of banking system assets. - 3-year horizon: 2022–2024. - Scenarios: - Baseline: aligned with preliminary July 2022 WEO; growth decelerates, inflation and credit growth rise, Lira depreciates. - Adverse: sharp downturn then recovery; higher inflation, currency depreciation, capital outflows, rising sovereign risk. - Solvency ST key findings: - Excluding regulatory forbearance and increasing risk weights on sovereign debt securities in FX, and FX required reserves and receivables from the CBRT to 100 percent, decreased the banking system CAR in 2021Q4 by 4 percentage points to 13.6 percent. - Baseline: average CAR would decline close to the regulatory minimum of 8 percent absent restrained credit growth. - Adverse: CAR declines by around 7 percentage points; six banks breach minimum capital requirements; aggregate capital needs ≈2 percent of GDP. - Counterfactuals on restructured loans (restructured loans ≈ almost 6 percent of total loans): - If 25 percent of restructured stage two loans become non-performing → NPL ratios increase by 1.5 percentage points; aggregate capital declines by 0.5 percentage points over the adverse horizon. - If 50 percent become non-performing → NPL ratios increase by 3 percentage points; aggregate capital declines by 0.7 percentage points. - Refinanced loans (no data collected) would reduce CAR further if becoming non-performing. - Liquidity ST and LCR findings: - Reported LCR as of end-2021: 450 percent in FX and 188 percent in total (inflated by regulatory settings). - Adjusted average FX LCRs (end-2021): - Option 1: 249 percent. - Option 2: 236 percent. - Option 3: 208 percent. - FX LCRs remain above regulatory minimum of 80 percent under stress scenarios, but approach the minimum in the severe scenario. - Total LCRs stayed above 100 percent regulatory minimum for all banks under scenario one; under severe scenario total LCR fell below 100 percent for one bank under options 1 and 2, and for three banks under option 3. - Cash-flow LST: under the severe scenario one third of banks would not have enough liquidity to cover short-lived outflows; half of banks would not have enough liquidity to cover outflows lasting 1 to 3 months. - Severe FX deposit outflows would force banks to draw heavily on CBRT reserves, potentially draining CBRT gross international reserves to very low levels; the result is more acute if capital flight occurs concurrently or external funding is severely pressured. - Systemic FX liquidity ST: - Moderate scenario: banks cover first and second-round cashflow needs; CBRT readily available FX liquidity declines as banks use excess reserves first. - Severe scenario: would require CBRT liquidity support, reducing CBRT readily available FX liquidity significantly; sensitivity analysis with capital flight could reduce CBRT readily available liquidity close to zero (conditional on assumptions about selling gold). ### Interconnectedness, contagion, and corporate sector stress tests - Interconnectedness: - Interbank contagion limited due to low interbank credit exposures; a failure of one bank would deplete other banks’ initial capital by about 0.2 to 1.8 percent on average. - Cross-border claims nearly two-thirds vis-à-vis the U.S., the U.K., and Germany (≈1.7 percent of GDP). - Banking system has large off-balance-sheet currency swap exposures mostly with GSIBs; a quarter of these exposures have maturity 0–3 months. - Cross-border contagion could deplete Turkish banking system capital by about 4 percent of initial capital under stress. - NFC stress tests (publicly listed firms covering ≈25 percent of NFC universe): - Many NFCs high leverage; median firm’s ICR around two at trough. - About 35 percent of NFCs in the sample faced viability challenges with ICR below one. - Under adverse scenario: median top 50 firms’ ICR fell from around 5 to 3; next 51–100 firms’ ICR reached two; median non-services-sector firm’s ICR remained above two; median services-sector firm’s ICR approached one. - Debt-at-Risk (DaR): under adverse scenario, debt held by firms with ICR below two would rise to nearly 60 percent from a pre-stress level of 20 percent. ### Supervision, regulation, and institutional capacity — key recommendations - Cross-cutting themes: - Realign financial incentives so real interest rates reflect macro fundamentals. - Rationalize idiosyncratic policy measures and phase them out in favor of broad-based, Basel-compatible macroprudential tools. - Refocus institutions on financial stability objectives and strengthen operational autonomy and resourcing. - Selected recommendations (short/medium term labels preserved where shown): - Activate the countercyclical capital buffer (CCyB) with phased build-up; rationalize heterodox measures. — CBRT, BRSA — ST - Clarify and prioritize financial stability in the FSC’s mandate; publish quarterly FSC reports. — FSC — ST - Amend the Banking Law to confirm financial stability as BRSA’s primary objective and enshrine operational autonomy and adequate resources. — MOTF, BRSA — MT - Restore intrusive, effective supervision aligned with international minimum standards; intensify supervisory engagement and reporting. — BRSA — ST - Strengthen systemic FX liquidity analysis, contingency planning, and integrate bank-central bank nexus into monitoring. — FSC (SRMG) — ST - Strengthen CBRT operational autonomy; focus interest rate policy on inflation; implement interest rate corridor through interbank operations and adherence to the corridor mid-point. — CBRT — ST - Limit FX interventions to extreme exchange rate volatility, define a volatility-based FX rule, and build FX reserves over time. — CBRT — MT - Finalize ELA reforms, including penalty pricing, expanded eligible collateral, contingency planning, and processes for government indemnity. — CBRT — ST - Integrate ICT/cyber risk into supervision; increase cyber drills and sector-wide exercises; finalize drafting of a cybersecurity law. — MOTF, BRSA, CBRT, CMB — ST - Take steps to exit the FATF grey list by addressing all areas in the FATF action plan, including politically exposed persons. — MASAK, BRSA, CBRT — ST - Introduce resolution planning for all banks; enhance SDIF resolution powers and prepare for limited use of SDIF funds consistent with loss absorbance and least-cost principles. — SDIF, BRSA, MOTF — ST - Introduce bail-in and private loss coverage principles aligned with FSB Key Attributes over time, with protections for retail investors and “no creditor worse off” safeguards. ### Supervision, liquidity metrics, and accounting standards - Prudential and supervisory fixes required: - Revert to conservative liquidity metrics (e.g., 50 percent haircut for FX required reserves in LCR); implement NSFR. - Restore prudent CAR calculation according to international standards (end-2021 BRSA measures increased consolidated CAR by 280 basis points). - Strengthen credit risk supervision, loan classification and restructuring rules; modernize insolvency and creditor rights via a new Enforcement and Bankruptcy Code. - Improve BRSA independence, resourcing, and budgetary autonomy; restore risk-based, forward-looking CAMELS and Pillar 2 integration (ICAAP and SRP). - Expand consolidated supervision for mixed-activity groups and impose supplemental standards at holding company level. ### Crisis management, resolution, and safety nets - Institutional setup and numbers: - SDIF deposit insurance reserve at end-September 2021: TL 80,537 million. - Deposit insurance coverage increased to 200,000 TL; coverage ratio of the deposit insurance reserve to total insured deposits ≈8 percent; provides full coverage to above 90 percent of natural person depositors. - Recommended reforms: - Make recovery plans mandatory for all banks and groups, including foreign affiliates; share recovery plans with SDIF. - Transfer decision to place a bank into resolution from BRSA to SDIF after BRSA FOLTF determination; empower SDIF to conduct resolvability assessments and draft resolution plans. - Introduce bridge bank, good-bad asset separation powers, temporary stays on contractual close-out rights, and pre-packed transfer tools for all banks. - End routine use of SDIF funds for all loss coverage, liquidity, and recapitalization; introduce resolution funding, bail-in power assessment, and least-cost principles. ### Data, crypto, climate, fintech, and financial inclusion - Data and measurement issues: - Extensive regulatory flexibility during the pandemic reduced reported NPLs and inflated reported capital; data gaps on refinanced loans and crypto exposures exist. - Readily available CBRT FX reserves exclude gold, non-hard currency FX, Treasury FX cash, and SDRs for adequacy assessment. - Crypto asset findings and recommendations: - 37 centralized crypto exchanges operate in Türkiye with an estimated 15 million accounts; average daily trading volume about US$0.8 billion in 2021. - Total crypto holdings about US$5 billion (0.6 percent of GDP) at end-2021. - Banks may not lend for crypto investment purposes, take direct holdings, or provide custody services; crypto assets prohibited for payment purposes in 2021. - Implement FATF Recommendation 15 on virtual asset activities; improve institutional coordination and data collection. - Climate risk: - Financial sector exposure to climate-related risks assessed as low to mid-range (physical risk mid-range by INFORM; transition risk lower mid-range). - BRSA analysis: CBAM could increase overall NPL ratio by 0.09 percent. - Authorities have national plans and targets including net zero by 2053; regulators are at early stages of integrating climate risks. - Recommended: harmonize climate-related data, develop climate stress testing capacity, build a climate finance strategy and green taxonomy aligned with the EU. - Fintech and financial inclusion: - 72 percent of adults had an account (2021); 16 percent had a mobile money account. - Financing gap for micro, small and medium enterprises remains significant. - Women and the bottom 40 percent by income have significantly lower financial inclusion. - CBRT studying potential risks and benefits of a CBDC. - Policy priorities: strengthen supervisory and monitoring frameworks for fintech, target MSME financing gaps, prioritize inclusion of women and bottom 40 percent. ### Cross-cutting short-term priorities - Emphasize systemic FX liquidity monitoring and contingency planning; develop an inter-agency playbook and reverse stress tests to identify tipping points. - Phase out idiosyncratic measures and activate Basel-compatible macroprudential tools, including the CCyB, while ensuring SOBs operate commercially under strengthened corporate governance. - Strengthen capacity, staffing, and remuneration at BRSA, CBRT, IPRSA, and SDIF to fulfill mandates and enable effective supervision and crisis preparedness. *Republic of Türkiye — International Monetary Fund (EXECUTIVE SUMMARY; chapter excerpts; data/policy cut-off 2021Q4).* ### EXECUTIVE SUMMARY __________________________________________________________________________ 7 ### EXECUTIVE SUMMARY ### Key recent developments and macrofinancial setting - Türkiye’s bank-dominated financial sector has grown markedly and shown areas of resilience since the last FSAP, including retained access to external financing in volatile times, a shift in lending away from foreign exchange (FX), improvements in elements of systemic liquidity management, and establishment of the Insurance and Private Pension Regulation and Supervision Authority (IPRSA). - Macroeconomic volatility has risen significantly recently. Persistently high inflation increased to almost 80 percent in mid-2022; the Turkish Lira (TL) has depreciated markedly; bank credit growth has been extremely rapid; and foreign investors have receded from local markets. - Demand for dollarized and state-guaranteed FX-protected TL deposits has risen alongside the adoption of a deeply negative real policy interest rate amid rapidly tightening global financial conditions. The war in Ukraine and higher commodity prices have further complicated the environment. ### Policy environment and distortions - A mosaic of heterodox and idiosyncratic policy measures has been used to: - restrain credit growth and direct it to priority activities, - limit dollarization, - support the exchange rate, and - lower government funding costs. - Many measures work at cross-purposes or diverge from international standards, create distortions, transfer risks to the government balance sheet, are unclear in overarching objective, may mask underlying problems, and are unlikely to be effective over the medium term. ### Financial stability risks and transmission channels - Financial sector risks are high and growing: - Credit growth, led by increasingly less profitable state-owned banks (SOBs), has contained reported non-performing loan (NPL) ratios, but SOBs have required repeated capital injections to maintain capital adequacy ratios (CARs). - Restructured loans have risen, and regulatory changes have impaired the accuracy of key supervisory indicators while facilitating loan refinancing on which data is not collected—potentially representing a stock of accrued problem assets that could test future systemic capital adequacy. - Corporate FX debt has declined, but high leverage and low interest coverage ratios in some sectors are risks. - The Financial Action Task Force (FATF) has placed Türkiye on its grey list. - Key interconnections that could undermine systemic stability: - FX liquidity risks have risen with deposit dollarization and low Central Bank of the Republic of Türkiye (CBRT) reserves. - A strong nexus exists between the CBRT and banks: banks’ FX assets held at the CBRT were about double CBRT readily available FX gross reserves and gold holdings in mid-2022. - Banks’ holdings of government debt have risen, partly to protect profitability via inflation-indexed government securities amid high inflation and competition from SOBs that offer lower loan rates. - Regulatory changes will force banks to hold a larger share of low-interest sovereign debt, raising potential adverse feedback risks. ### Stress test and liquidity results - Solvency stress tests: - Under the FSAP’s baseline scenario the average CAR for the 10 largest banks would decline to just above the 8 percent regulatory minimum. - In an adverse scenario, the minimum CAR threshold would be breached. - Uncertainty over supervisory metrics affects these results. - Liquidity stress tests: - Banks were resilient to moderate FX deposit outflows at end-2021, but vulnerable to severe outflows. - Under a severe FX deposit outflow scenario, banks would need to draw heavily on reserves held at the CBRT, and potentially seek additional FX from the CBRT; meeting such needs would drain CBRT gross international reserves to very low levels, risking adverse feedback effects. - The result would be more acute if capital flight occurred concurrently or if banks’ access to external funding was severely pressured. ### Cross-cutting policy themes and high-level recommendations - Three cross-cutting themes: - Realign fundamental financial incentives so real interest rates reflect macroeconomic fundamentals and limit the buildup of financial sector vulnerabilities. - Rationalize idiosyncratic policy measures that reduce predictability and are unlikely to deliver systemic capital allocation consistent with macrofinancial stability. - Refocus institutions on financial stability objectives, strengthening operational autonomy, resourcing, and prioritization at key agencies. - Macroprudential and systemic risk monitoring: - The systemic risk monitoring framework should emphasize financial stability and simplify and tighten macroprudential policies. - Greater clarity is advised on prioritizing financial stability in the Financial Stability Committee’s (FSC) mandate. - Phase out idiosyncratic measures in favor of tighter broad-based macroprudential capital tools as incentives are realigned; increase the countercyclical capital buffer; maintain selective borrower-based tools for sectoral risks. ### Supervision, regulation, and institutional capacity - Banking supervisory practices and the regulatory framework require enhancement: - The BRSA’s financial stability mandate has been compromised by government policies and it is severely resource constrained. - Official information on credit quality, capital adequacy, and liquidity risk likely understates increased risk due to regulatory revisions and forbearance. - Recommendations include restoring intrusive, effective supervision aligned with international minimum standards; intensifying supervisory engagement; reengineering supervisory processes; improving remuneration and staffing; aligning regulatory and accounting practices with Basel and international standards; and intensive liquidity monitoring (especially FX). - Systemic liquidity management and CBRT operational framework: - Operational elements have improved and the CBRT’s liquidity management has been simplified, but the overarching policy framework has become opaque due to multiplicity of instruments and objectives and erosion of CBRT autonomy. - Recommendations include strengthening CBRT operational autonomy, focusing interest rate policy on inflation, implementing the interest rate corridor through interbank operations and adherence to the corridor mid-point, restraining FX intervention to extreme volatility and building FX reserves over time, and finalizing ELA reforms. - Cybersecurity and fintech: - Cyber risks are well recognized; legal and institutional frameworks support cybersecurity, but regulatory coverage, consistency, and coordination could improve. - Integrate cyber risk into the supervisory process and factor ICT/cyber risks into financial stability analysis and crisis planning. - High levels of digitalization have promoted financial inclusion; fintech and crypto-asset risks are recognized and should be integrated into supervision while ensuring a level playing field and institutional coordination. - Crisis management and resolution: - Türkiye has a reasonably clear institutional recovery and resolution framework but should: - Extend recovery planning to all banks (and groups/foreign affiliates), - Enhance SDIF resolution powers, assessments, planning, and resolution financing, - End use of SDIF funds for all loss coverage, liquidity, and recapitalization purposes and introduce loss absorbance principles, resolution funding, and least-cost concepts in line with FSB Key Attributes. - Capital markets: - Persistent challenges impede deepening: volatile macrofinancial conditions and a complex tax framework inhibit TL capital market deepening and institutional investor development, resulting in a “short maturity, dollarized” equilibrium. ### Selected main recommendations (excerpted from Table 1) - Systemic Risk and Macroprudential Policies - Rationalize heterodox and idiosyncratic policy measures while realigning financial incentives to reduce distortions; activate countercyclical capital buffer. — CBRT, BRSA — ST - Refocus the systemic risk monitoring framework to ensure clarity of financial stability as the primary objective of the FSC. — FSC — ST - Strengthen FX systemic liquidity analysis incorporating systemic FX availability, contingency planning, and consider interlinkages when discussing macroprudential policy options. — FSC (SRMG) — ST - Banking and Insurance Supervision and Regulation - Amend the Banking Law to confirm financial stability as the primary objective of the BRSA and enshrine policy independence, operational autonomy and adequacy of resources. — MOTF, BRSA — MT - Restore and/or enhance standards for intrusive, effective supervision for all banks, notably for liquidity, FX, sovereign and concentration risk, credit risk, including problem assets and provisions, and interest rate risk in the banking book; align regulations with international minimum standards. — BRSA — ST - Intensify supervisory engagement and monitoring using meaningful reporting practices, accompanied by robust, timely intervention and follow up with banks. — BRSA — ST - Enhance the risk-based, forward-looking perspective of the CAMELS process, integrating Pillar 2 assessments (ICAAP and SRP), off-site work, stress-testing and ICT/Cyber dimensions. — BRSA — MT - Set financial stability as the legal objective of insurance supervision, ensure transparency of the nomination, appointment and dismissal processes of IPRSA’s board members; and introduce a formal Own Risk and Solvency Assessment process. — Presidency, IPRSA — MT - Systemic Liquidity - Strengthen the CBRT’s operational autonomy, focus interest rate policy on inflation. Implement the interest rate corridor through monetary operations on the interbank money market solely. — CBRT — ST - Limit FX interventions to the most extreme cases of exchange rate volatility. Define a volatility-based FX rule. Build FX reserves over time. — CBRT — MT - Finalize review of the ELA framework. — CBRT — ST - Cyber Resilience - Ensure FSC discusses ICT/cyber risks regularly and facilitates coordination among member agencies. Integrate ICT/cyber risk supervision within overall supervisory process. — MOTF, BRSA, CBRT, CMB — ST - Factor ICT/cyber risks in the financial stability analysis, develop a crisis management plan to address potential large-scale cyber-attacks. — BRSA, CBRT — MT - Financial Integrity - Take steps to exit the FATF grey list by demonstrating effectiveness and addressing all areas identified in the FATF’s action plan, including with respect to politically exposed persons. — MASAK, BRSA, CBRT — ST - Monitor key financial integrity risks stemming from the grey listing, and other cross-border regulatory actions. — MASAK, MOTF, BRSA, CBRT — MT - Implement FATF Recommendation 15 to address virtual asset risks. — MASAK, CMB — ST - Crisis Management and Resolution - Introduce resolution planning and consider extending recovery planning to all banks; extend recovery requirements to entire groups and foreign affiliates. — SDIF, BRSA — ST - Enhance SDIF resolution powers in line with the FSB Key Attributes and empower SDIF to start preparations in the run up to resolution. Introduce a full P&A concept beyond insured deposits for all banks regardless of SDIF shareholdership status. — SDIF, MOTF — ST - End the use of SDIF funds for all loss coverage, liquidity, and recapitalization purposes and introduce loss absorbance principles in line with the liquidation hierarchy. Introduce resolution funding and the least-cost concept for SDIF funds. — SDIF, MOTF — ST *Republic of Türkiye — International Monetary Fund (EXECUTIVE SUMMARY)* ### 16. Türkiye has experienced high but volatile growth since the last FSAP. Real economic ### Türkiye has experienced high but volatile growth since the last FSAP ### Recent macrofinancial developments - Real economic growth averaged almost 5 percent since the last FSAP, with periods of strong expansion followed by sharp slowdowns. - Double-digit inflation persisted; the official inflation target is 5 percent. - The Lira (TL) depreciated sharply in 2018 and 2021. - External financing needs remained high and deposit dollarization rose steadily; FX reserve adequacy slipped. - Public debt ratio was just over 40 percent, but fiscal risks from contingent liabilities increased. - Authorities’ pandemic response in 2020 included repeated CBRT policy rate cuts, balance sheet expansion, rapid credit growth through SOBs supported by state guarantees, an Asset Ratio, changes to reserve requirements, and regulatory measures (including delayed stage two and NPL classification) that supported NFCs and masked NPL data. - Growth rebounded to more than 11 percent in 2021; despite inflation four times the target, in late 2021 the CBRT reduced the policy rate by 500 basis points. - Late-2021 macrofinancial volatility: Lira lost half its value against the dollar; conversion of Lira deposits into FX deposits accelerated; sizable portfolio outflows occurred; CBRT resumed FX intervention despite scarce reserves. - Authorities announced a “Liraization Strategy” including compensation scheme for Lira term deposits; FX-protected TL accounts reached 15 percent of total deposits in mid-2022, transferring risk to the government balance sheet and raising contingent liabilities. - By mid-2022 inflation rose to almost 80 percent and credit growth to over 60 percent; significant negative real policy rate and structural lack of FX remained; sovereign CDS spreads reached high levels. - War in Ukraine added to inflation challenges, exacerbated the current account deficit, raised external financing needs, and pressured international reserves. ### Financial system structure and performance - Financial assets stood at 148 percent of GDP in 2021; banks account for 90 percent of these assets. - Banking sector assets expanded nearly four times since the last FSAP; TL assets grew threefold, exceeding GDP growth. - Deposits grew comparably, with FX deposits accounting for an increasing share. - SOBs now account for almost half of total loans by deposit-taking institutions (30 percent at the last FSAP); SOB lending rates averaged around 300 basis points below the rest of the system since the last FSAP. - Participation banks and development and investment banks have rising but smaller shares. - Non-bank financial sector accounted for only 10 percent of domestic financial sector assets (as of 2021Q3): pension funds 3.5 percent, insurance companies 2.4 percent; factoring, financing, and leasing companies less than 2 percent. - Insurance sector: gross premiums grew almost 20 percent a year through 2020; total insurance penetration was less than 1.6 percent at end-2020; life insurance business was 0.3 percent. - At end-2021 outstanding public and private debt amounted to 40 and 7½ percent of GDP respectively; stock market capitalization was 30 percent of GDP. - Government bonds account for more than 90 percent of debt securities; SOBs own around 38 percent of government bonds; CBRT holds just over 4 percent. - Foreign investor holdings of public debt declined from 20 percent in 2017 to 1.6 percent in mid-2022. - Households increased holdings of FX and gold deposits and FX-protected TL deposits; share of local equities in household financial assets rose from less than 9 percent in 2018 to almost 14 percent. - Crypto activity high: Global daily transaction volumes of Tether against TL peaked at US$2.2 billion per day in 2021. ### Sources of resilience and elevated risks - Resilience: - Bank loan composition shifted from FX to TL, improving resilience to exchange rate shocks. - Households cannot borrow in FX by regulation. - Wholesale funding, though declining, proved resilient historically. - Elevated risks: - Rapid credit growth pressures banks’ capital and contributed to a sizable credit gap, inefficient capital allocation, and higher contingent liabilities for the government. - Two bank business models: SOBs with lower lending rates and declining profitability; private banks with higher lending rates, better profits but lost market share. - SOB recapitalizations totaled around 1.8 percent of GDP since 2018. - Recently adopted regulations incentivizing holdings of fixed-rate TL securities could weaken banks’ profitability and raise feedback risk under adverse shocks. - Reported NPL ratio declined to 2.5 percent system-wide and 1.7 percent for SOBs; stage two loan ratio just below 10 percent; loan restructurings rose to 5.7 percent; significant regulatory flexibility and data gaps exist on refinanced loans. - Reported system-wide capital was over 18 percent of risk-weighted assets at end-May 2022, but this is inflated by regulatory flexibility; BRSA minimum CAR is 8 percent and target CAR is 12 percent. - Leverage ratios have been trending downward. - FX deposit dollarization: FX deposits rose to around 65 percent of total bank deposits in December 2021; FX-protected TL deposits and other measures interrupted this trend. - System-wide FX liquidity coverage ratio around 400 percent is inflated by liquid assets at the CBRT, including required reserves and potential inflows from swaps with the CBRT. - Large currency mismatch: lower FX loans and higher FX deposits produced a gap closed off-balance sheet with FX swaps, largely with the CBRT; banks carry large off-balance sheet positions that, aside from CBRT FX swaps, include cross-currency and interest-rate swaps. - CBRT reserves below the ARA floor; readily available reserves fell to 22 percent of total CBRT gross reserves (at mid-2022) from 80 percent at the last FSAP. - Almost three quarters of CBRT FX liabilities are owed to domestic banks (deposits or swaps), larger than total CBRT FX reserve assets. - Corporate sector: FX-denominated corporate debt declined since 2018 and NFCs halved their net FX position in dollar terms, but Lira depreciation erased much progress; corporate leverage increased; debt service costs have pressured interest coverage ratios (ICR), ICR around 1.5 on average across all sectors in 2020; tourism sector ICR turned negative in 2020; transportation and real estate ICRs below one. - Household sector: low debt levels (household loans one fifth of total bank loans, less than 20 percent of GDP); mortgage loan average maturity 5.6 years and mortgages amount to 6 percent of total banking sector loans; sharp rebound in housing sales and real house prices requires close monitoring. ### Data and measurement concerns - Extensive regulatory flexibility during the pandemic reduced reported NPLs and inflated reported capital; data gaps exist on the types and performance of restructured loans and on refinanced loans retained as performing. - Availability of reliable crypto stock and flow data is limited due to decentralized systems and underdeveloped reporting requirements. - Readily available CBRT FX reserves exclude gold, non-hard currency FX, Treasury FX cash, and SDRs for adequacy assessment. ### Authorities’ views (as reported) - Authorities recognized macrofinancial volatility challenges and the social role of SOBs; acknowledged below-market lending rates of SOBs and expected credit growth to moderate following policy measures. - They characterized regulatory flexibility as part of pandemic response, noted most measures have been unwound, and expected banks to remain adequately capitalized given prudent provisioning. - Authorities were sanguine about resilience to FX liquidity risks, emphasizing stabilizing role of FX-protected deposits, adequacy of banks’ FX liquid assets to cover outflows, and adequacy of CBRT reserves to handle liquidity pressure. - On corporate risks, authorities noted improvements in firms’ net open FX positions and short-term FX buffers and recognized exuberant house prices while highlighting high incidence of cash-only transactions and conservative mortgage lending. *Source: Chapter excerpt from IMF country report content unit 1turea2023002* ### 41. Banking stress tests (ST) examined systemic solvency and liquidity resilience. The ST ### Banking stress tests (ST) examined systemic solvency and liquidity resilience. The ST ### Overview - The ST covered the 10 largest banks (four of which are state owned) by asset size, constituting approximately 80 percent of banking system assets. - Main macrofinancial risks: high inflation, dollarization, and NFC leverage; very rapid credit expansion and weakening bank profitability for SOBs; elevated risk premia; and low CBRT reserves. - Resulting vulnerabilities: capital outflows, dollar deposit flight, and currency depreciation. - Data/policy cut-off date: 2021Q4. ### Scenarios (3-year horizon, 2022–2024) - Baseline scenario: - Drew on the preliminary July 2022 World Economic Outlook. - Assumptions: growth decelerates, inflation and credit growth rise, and the Lira depreciates. - Adverse scenario: - Sharp economic downturn followed by a recovery. - Incorporated increase in inflation, currency depreciation, capital outflows and a rise in sovereign risk. - Result: increased funding costs for NFCs and solvency and liquidity pressure on banks. - Potential triggers: global geopolitical tensions, a sharp rise in global risk and term premia, a deterioration in sentiment or a prolonged pandemic. ### Solvency Stress Tests — Key findings - Excluding regulatory forbearance and increasing risk weights on sovereign debt securities in FX, and FX required reserves and receivables from the CBRT to 100 percent, decreased the banking system CAR in 2021Q4 by 4 percentage points to 13.6 percent. - Baseline scenario: - Banking system CAR would gradually decline close to the regulatory minimum of 8 percent in the absence of restrained credit growth. - Risk-weighted assets increase significantly due to high credit growth and TL depreciation. - Profits and other income are inadequate to offset the impact of risk-weighted assets on CAR, mainly due to higher interest rates on short-term funding and sovereign debt exposures. - Adverse scenario: - Banking system CAR would decline significantly, falling below the regulatory minimum. - CAR declines by around 7 percentage points over the horizon of the stress test, with six banks breaching minimum capital requirements. - Aggregate capital needs would amount to around 2 percent of GDP. - Decline drivers: (i) loss provisions; (ii) compression of lending spreads; and (iii) mark-to-market losses on sovereign debt exposures. - Counterfactuals on restructured loans (restructured loans ≈ almost 6 percent of total loans): - First counterfactual: 25 percent of restructured stage two loans become non-performing → NPL ratios increase by 1.5 percentage points; aggregate banking system capital declines by a further 0.5 percentage points over the adverse ST horizon. - Second counterfactual: 50 percent of restructured stage two loans become non-performing → NPL ratios increase by 3 percentage points; aggregate banking system capital declines by a further 0.7 percentage points over the adverse ST horizon. - Notes: - Refinanced loans, on which no data is collected, would reduce CAR further if they were to become non-performing. - Idiosyncratic policy measures and recapitalization of SOBs in 2022 were not included in the analysis, as the stress test starting point is based on 2021Q4 data. - Credit grows at the rate of nominal GDP in the baseline (Figures 10, 11). ### Authorities’ views on solvency - Authorities agreed on the need to contain credit growth to avoid capital pressures and expect CARs to remain well above the regulatory minimum. - They highlighted recent policy measures to restrain credit growth and expected a significant decline in nominal credit growth in the near term. - They believed banks could protect profits by widening interest margins and increasing investment in CPI linked securities. - They noted a more positive growth outlook and the 2022 recapitalization of SOBs would support banks’ capital adequacy. ### Liquidity Stress Tests — LCR and cash-flow analyses - Two liquidity stress tests conducted at end-2021: - Cash-flow-based liquidity stress test (LST) assessing total (TL and FX) and FX liquidity under three scenarios of increasing severity (first aligned with LCR stress parameters; other two calibrated to Türkiye’s historical experience and solvency ST). - LCR-based stress test. - Stress elements included market liquidity stress (haircuts on debt securities), funding liquidity stress (outflows of unsecured funding by retail and corporate customers, and outflows of funding from banks abroad), and scarce access to FX accounting for CBRT readily available FX liquidity. - Three CBRT readily available FX liquidity options: - Option 1: Most GIR assumed readily available FX liquidity, except SDRs, official bilateral non-hard currency swaps, and treasury FX deposits held at the CBRT at end-2021. - Option 2: As in option 1 plus CBRT willing to sell 75 percent of gold holdings to provide FX liquidity. - Option 3: As in option 1 plus CBRT willing to sell 50 percent of gold holdings. - Reported LCR as of end-2021: 450 percent in FX and 188 percent in total (inflated by regulatory settings). - Adjustments to LCRs (end-2021) produced average FX LCRs: - Option 1: 249 percent. - Option 2: 236 percent. - Option 3: 208 percent. - LCR stress test results: - FX LCRs remained above the regulatory minimum of 80 percent under the stress scenarios for all banks, but in the severe scenario FX LCRs approached the minimum. - Total LCRs stayed above the 100 percent regulatory minimum for all banks under scenario one. - Under the severe scenario, total LCR fell below 100 percent for one bank under options 1 and 2, and for three banks under option 3. - Key driver: funding outflows from retail and corporate deposits. - Cash-flow-based LST results: - Most banks had enough FX and total liquidity to cover outflows under the moderate scenario at end-2021. - Under the severe scenario a FX funding gap emerges: one third of banks would not have enough liquidity to cover short-lived outflows, and half of the banks would not have enough liquidity to cover liquidity outflows lasting 1 to 3 months. - Caveats: - Analyses do not account for capital flight outside of banks’ deposits, a large adverse shock to all sources of banks’ wholesale funding, or a possible offshoring of banks’ FX liquid assets, each of which would increase scarcity of FX liquidity. ### Authorities’ views on liquidity - Authorities were confident in the banking sector’s resilience to liquidity stress and considered the severe deposit outflows unlikely given Türkiye’s historical experience. - They considered FX readily available liquidity at the CBRT as adequate and FX inflows from banks’ swaps with the CBRT as available. - They viewed the FX LCR as adequately calculated. ### Systemic FX Liquidity Stress Tests - Assessed impact of stress from NFCs, households, and general government on CBRT reserves, including large off-balance-sheet FX derivatives positions and second-round effects over a one-month horizon. - Moderate scenario: - Banks covered first and second-round cashflow needs from liquid assets, excess reserves, and FX inflows mostly from external sources. - Resulted in a decline in CBRT’s readily available FX liquidity as banks used excess reserves before interest-bearing FX liquid assets. - Severe scenario: - Would require CBRT liquidity support, reducing CBRT readily available FX liquidity significantly, especially if accompanied by capital flow reversals. - Sensitivity analysis: with capital flight alongside severe deposit outflows, CBRT’s readily available liquidity could reach close to zero (conditional on assumptions regarding CBRT’s willingness to sell gold). ### Interconnectedness and Contagion - High interconnectedness with domestic NFC sector and households implies potential for shock propagation via credit risk; banking system has considerable exposure to NFCs and households via deposits and loans. - Other sectors (insurance, pension funds, investment and money market funds) are relatively small with limited potential for systemic risk. - Interbank contagion analysis: - Contagion risk among the 10 largest banks is limited, reflecting low interbank credit exposures. - A failure of one bank would not lead to a direct default of the other nine banks. - On average, a failure of one bank would deplete initial capital of other banks by about 0.2 to 1.8 percent. - Cross-border spillovers: - Nearly two-thirds of cross-border claims are vis-à-vis the U.S., the U.K., and Germany (adding up to around 1.7 percent of GDP). - Cross-border exposures to Russia and Ukraine appear limited. - Banking system has large off-balance-sheet currency swaps exposures mostly with GSIBs; a quarter of these exposures have short maturity duration (0-3 months). - As a share of foreign banks’ assets, these exposures are relatively small. - Contagion risks due to credit and funding shocks originating from other banking systems could deplete the Turkish banking system’s capital by about 4 percent of its initial capital. - Authorities’ views: - Broad agreement with interconnectedness findings. - Low domestic contagion risks reflect small domestic interbank exposures. - Some regional cross-border exposures reflect establishment of Turkish branches abroad. - Authorities viewed vulnerabilities from NFC and household sectors as limited due to low reported NPLs. ### Nonfinancial Corporate Sector (NFC) Stress Tests — Key findings - NFC stress tests based on listed firms’ data covering about 25 percent of the Turkish NFC universe. - Many NFCs have high leverage; real interest rate rises cause viability deterioration. - Median firm’s ICR remained around the critical threshold of two at the trough of the stress episode. - About 35 percent of NFCs in the sample faced viability challenges with their ICR falling below one. - Sectoral resilience: - Larger and non-services sector firms more resilient. - Under the adverse scenario, median top 50 firms’ ICR fell from around 5 to 3. - Next 51–100 firms’ ICRs reached the critical threshold of two; other firms fell below two. - Median non-services-sector firm’s ICR remained well above two; median services sector firm’s ICR reached closer to one in the adverse scenario. - Credit risk: - Debt-at-risk (DaR) analysis: under the adverse scenario, debt held by firms with poor viability (ICR below two) would rise to nearly 60 percent from a pre-stress level of 20 percent. - Authorities’ views: - Highlighted resilience of larger NFCs; noted one third falling below an ICR of one is driven by smaller listed firms. - Authorities believed export-oriented firms maintain natural hedging capacity under the 40 percent export revenue surrender requirement. ### Climate Risk — Financial sector exposure and preparedness - Türkiye’s financial sector faces low to mid-range exposure to climate-related risks. - Physical risk: mid-range according to the INFORM climate risk indicator. - Transition risk: lower mid-range based on a carbon-reduction preparedness index; could increase if the EU finalizes its Carbon Border Adjustment Mechanism (CBAM). - BRSA transition risk analysis: CBAM could impact borrowers in five affected sectors, estimated 0.09 percent increase in the overall NPL ratio. - A pilot physical risk analysis is being used to build a risk assessment model by the BRSA. - Insurance sector exposure to climate-related risks appears limited and centered on the agricultural sector (most policies written by TARSIM). - National plans include: National Climate Change Strategy (2010–2023), Green Deal Action Plan (GDAP), Climate Council Advisory decisions, and targets to reduce carbon emissions to net zero by 2053. - Financial regulators have taken initial steps to integrate climate issues in governance and strategies and are aware of BCBS principles for supervision of climate risks. - Most financial institutions are at an early stage of integrating climate risks into strategy and operations and have called for more guidance. *Source: IMF staff analysis (chapter content, data/policy cut-off 2021Q4).* ### 69. Enhancing data capacity and risk assessments would be beneficial. Efforts could be ### Enhancing data capacity and risk assessments ### Climate data and risk assessments - Enhancing data capacity and risk assessments would be beneficial. - Efforts could be aimed at harmonizing and enhancing climate related data, such as firm-level carbon intensity or granularity of data on location for loans, with close coordination among relevant stakeholders. - Simplified climate risk assessments (e.g., by measuring exposures) to explore the potential implications of climate risks for the insurance and pension fund sectors and their supervisory objectives could also be undertaken. - Authorities’ views: The authorities were seeking to build on their efforts to support climate risk mitigation and adaptation. They expressed interest in capacity development to strengthen climate stress testing methodologies and recognized the need to improve data collection and its use for risk management and supervision. ### Crypto assets — activity and exposures - Findings: - 37 centralized crypto exchanges operate in Türkiye with an estimated 15 million accounts of mainly Turkish investors. - The average daily trading volume was about US$0.8 billion in 2021. - Total crypto holdings amounted to about US$5 billion (0.6 percent of GDP) at end-2021. - There was a notable rise in global trading volumes of Tether against TL at times of exchange rate volatility. - Market structure and restrictions: - At present the regulated financial sector plays a limited role in crypto market activity. - Banks or the Postal and Telegraph Corporation must be used for on and off ramps to domestic and global crypto exchanges. - Banks may not lend for crypto investment purposes, take direct holdings in crypto assets, or provide crypto-related services, such as custody services, but they remain exposed to indirect crypto risks through their customers’ exposures. - Crypto assets were prohibited for payment purposes in 2021. - Regulatory developments and recommendations: - The Capital Markets Board (CMB) is drafting a law and formulating a regulatory framework for crypto investment platforms with a focus on investor protection. - The CBRT is working on a framework for the use of stablecoins for payment. - The Financial Crimes Investigation Board (MASAK) has identified service providers as obliged entities for customer due diligence, suspicious transaction reports, and periodic reporting for AML/CFT purposes. In this context, implementation of the Financial Action Task Force (FATF) Recommendation 15 on virtual asset activities is advised. - More broadly, improvements in institutional coordination on the regulatory and supervisory approach, and data collection, would be beneficial. - Authorities’ views: The authorities acknowledged the need to address the risks arising from crypto assets. This includes the important ongoing legislative efforts to establish a regulatory framework for crypto platforms and stablecoins for payment use, and implementation of an effective supervision and enforcement regime. ### Financial sector oversight — overall policy normalization - Key messages: - Policy normalization is needed to realign fundamental financial incentives, rationalize idiosyncratic regulatory and administrative measures, and refocus on financial stability objectives. - Macrofinancial stability will be very difficult to achieve without policy normalization, which involves realigning financial incentives to appropriately price risks and returns in real terms to reflect macroeconomic fundamentals and limit the buildup of financial sector vulnerabilities. - Rationalizing the complicated mosaic of idiosyncratic financial sector policies adopted recently while ensuring their internal consistency and Basel compatibility would reduce distortions, improve policy clarity and predictability, and help incentivize systemic behavior consistent with macrofinancial stability. - Cross-cutting policy normalization actions recommended: - Ensuring operational autonomy of the CBRT, BRSA, IPRSA, and SDIF to allow them to resolve internal contradictions within the current constellation of policy settings and rationalize idiosyncratic regulatory measures. - Financial stability should take priority over other objectives. Rebalancing toward stability over near-term growth is imperative given the risks that have emerged. - Increasing resources for institutions to fulfill their mandates effectively, improving their ability to attract and retain talent, ultimately building strong foundations to address future challenges. - Strengthening coordination across financial regulatory agencies in the areas of systemic risk monitoring, crisis management and preparedness, cyber-resilience, and climate. ### A. Systemic Risk Oversight and Macroprudential Framework - Institutional arrangements and mandate: - Systemic risk oversight falls under the purview of the Financial Stability Committee (FSC), created in 2011. It was restructured and renamed the Financial Stability and Development Committee in 2019, and restructured again in May 2021 when the FSC took its current form. - Ambiguity in the language of the FSC’s legislative mandate should be clarified, reaffirming that financial stability comes first. The broadened mandate recognizes possible trade-offs, and recent actions have tilted toward supporting growth at the expense of systemic risk. - Transparency, accountability, and monitoring: - The relaunch of the FSC architecture is welcome, but more is needed, including a framework for transparency and accountability. FSC subgroups focusing on systemic risk, crisis management, fintech, financial development, and evaluation of the impact of regulations have been (re-) established. Publication of planned quarterly FSC reports is recommended. - The CBRT has continued to improve the heat map used to monitor systemic risk and should leverage its role as chair of the Systemic Risk Monitoring Group (SRMG) to assemble an integrated picture of risks beyond the heat map, including interconnectedness, solvency, liquidity, impact of macroeconomic volatility, corporate and household health, and scanning beyond the regulatory perimeter for systemic risk. Cyber resilience, crypto and climate risk also warrant greater attention from the SRMG. - Short-term priorities and policy interactions: - Interlinkages and feedback effects should be considered when policy measures affecting systemic risk are considered; recent measures include some that act at cross-purposes and others that create distortions in price formation (e.g., policies that set real rates deeply negative and lower lending rates at SOBs have incentivized greater credit creation, even as other measures constrain growth via indirect costs such as reserve requirements on commercial loans). - Short-term focus: systemic FX liquidity. Actions recommended: - CBRT should closely monitor developments in systemic FX liquidity. - Work with the BRSA to ensure that the bank-central bank nexus is integrated into analysis. - Expand liquidity monitoring tools and revert to calculating more prudent liquidity coverage ratios. - Lead contingency planning, including reverse stress tests to determine critical tipping points. - Develop a “playbook” during calmer times on how each agency would react during crisis. - Credit growth restraint: Use Basel-compatible tools, rationalize idiosyncratic measures, and realign financial incentives. Recommendations include activation of the countercyclical capital buffer (CCyB) with phased build-up, and ensuring SOBs operate on a commercial basis subject to strengthened corporate governance with supervisory attention to liquidity and asset quality. - Selected borrower-based measures should be reassessed as policy normalization occurs; those with clear macroprudential objectives (e.g., mortgage-related measures in the context of soaring real estate prices) may be appropriate to retain, while measures to redirect credit for sectoral growth objectives should be phased out. - Authorities’ views: The authorities agreed that financial stability should be the primary focus of the FSC, indicating that this was already the case, and noted ambiguities in translation of the legislative mandate which could be clarified. They observed that a healthy financial system supporting sustainable economic growth and market confidence follows from a focus on systemic risk and noted that several borrower-based measures had already been taken; implementing the CCyB could be considered. ### B. Financial Sector Regulation and Supervision — Banking Regulation and Supervision - Compliance and supervisory shortcomings: - An assessment of the Basel Core Principles (BCP) in the last FSAP found five principles to be materially non-compliant: independence, accountability, resourcing and legal protection for supervisors (CP2); supervisory approach (CP8); corporate governance (CP14); credit risk (CP17); and problem assets, provisions and reserves (CP18). - Shortcomings relating to credit risk and the supervisory approach have deteriorated further, including regulatory dilution and supervisory practices left exposed by resource limitations. FX vulnerability, liquidity risk, ICT risk, operational resilience and the impact of COVID-19 related measures have emerged as concerns. - BRSA independence, resourcing, and remit: - The BRSA’s effectiveness is significantly impaired by restrictions on its independence, resources, and tensions between its objectives. Legislative changes have hard coded incursions on BRSA independence, including amendments requiring the BRSA to comply with principles, strategies and policies set down in government plans and programs (Decree-Law Nº 703/2018). The President may remove public officials for failure to achieve institutional goals irrespective of other legal grounds (Decree-Law No. 2018/703). - Measures taken since 2018 to increase credit supply have highlighted conflict between BRSA’s objectives of financial stability and development of the financial sector. Budgetary constraints and imposition of civil service pay scales have led to major outflow of staff and experience. Restoring BRSA’s budgetary autonomy and subordinating financial sector development to financial stability are essential. - Supervisory approach improvements needed: - Strengthen from gatekeeping to enforcement, focusing on enhanced and forward-looking risk assessments. Enhance techniques and tools, deepen corporate governance and risk management supervision, and upgrade fit and proper assessments to be risk-based and aligned with international standards. - The annual CAMELS rating process consumes most onsite resources but requires a risk-focused approach grounded in key risk assessment criteria. Examinations currently focus on regulatory breaches and errors rather than underlying causes. Offsite supervisory work should be incorporated into CAMELS ratings to capture risks, including stress testing results. Deepen the supervisory review of the Pillar 2 framework and strengthen supervisory enforcement with a formal response policy to CAMELS ratings to operationalize early remedial powers. - Supervision and enforcement functions need enhanced communication and integration; key departments (onsite, offsite, enforcement, risk management) function in silos and require formalized, fluid, and effective communications. - Consolidated supervision and mixed-activity groups: - Effective consolidated supervision of banks within mixed-financial and mixed-activity groups requires imposing supplemental standards on parent entities. Governance, risk management standards, capital and other prudential requirements should apply at the consolidated group and holding company level, which cannot be directly regulated under current Banking Law. Banks should be ring fenced, to the extent possible, from non-financial contagion risks. Enhanced suitability and transparency requirements should be imposed throughout the ownership chain, including extended reporting systems to identify, monitor, and report inter-group transactions above the level of the regulated bank. - Prudential standards dilution and asset quality: - Prudential regulatory terms and criteria have been eliminated or eased since 2016 at potential expense of financial stability, diluting credit discipline and facilitating untracked problem loan refinancing; together with COVID-19 measures (revoked with full effect from April 2022), this likely resulted in artificially low NPL ratios and provisioning. Strengthen supervision of credit risk management (including loan classification and restructuring rules) and focus supervisory assessment on asset quality, particularly at SOBs with high credit portfolio growth. Two new credit guidelines addressing some issues are expected to enter into force in 2022. - Official capital ratios are unlikely to reflect the increase in risk since the last FSAP. Measures permitted for banks include using an exchange rate based on the CBRT’s average FX buying rates over the previous 252 business days (for four months in 2018 and since March 2020—changed in 2022 to the end-2021 exchange rate) and excluding mark-to-market losses of available-for-sale securities. Contrary to Basel standards, banks’ Turkish FX sovereign exposures are zero risk weighted. The BRSA monitors the capital adequacy impact of the first two measures, which, as of end-2021, increased the consolidated banking system CAR by 280 basis points. There is an urgent need to restore prudent CAR calculation according to international standards. - Nonperforming loans, resolution, and legal reforms: - Moderate NPL figures may be misleading; strong supervisory action and legal reforms will be needed for resolution of problem assets. Priority actions include strengthening the prudential framework, intensifying supervisory scrutiny of asset quality and NPL management practices, enacting a new Enforcement and Bankruptcy Code to modernize insolvency and creditor rights, improving out-of-court restructuring, and enhancing the market for distressed assets with more flexibility for Asset Management Companies. After reforms, an independent third-party asset quality review (AQR) would help assess credit risks and restore confidence. - Liquidity metrics and supervisory measures: - Reported LCRs likely underestimate risks, particularly in FX, and the net stable funding ratio (NSFR) has not been implemented. LCR calculation has been boosted by regulatory changes to include the totality of CBRT required reserves as Level 1 HQLA; inflows from FX swaps with the CBRT; and revisions to inclusion of outflows from market valuation changes on derivatives. Although FX receivables from the CBRT due to swaps and required reserves are included in LCR calculation (in line with Basel standards), they may not be readily available given low CBRT FX reserve assets. Recommended measures related to intensifying supervision of liquidity risk include: - Reverting to conservative liquidity metrics—e.g., a 50 percent haircut for FX required reserves in the LCR. - Revamping contingency planning for a significant FX shock. - Enhancing liquidity risk monitoring. *Source: Excerpt from the IMF staff report chapter provided in the source content.* ### 95. With the banking book representing 90 percent of banks’ assets, interest rate risk in ### 95. With the banking book representing 90 percent of banks’ assets, interest rate risk in ### Banking book interest rate risk and supervision - Finding: The banking book represents 90 percent of banks’ assets, making interest rate risk in the banking book (IRRBB) a major risk amid elevated macrofinancial volatility. - Finding: The 2011 regulation on IRRBB does not incorporate the 2016 BCBS standard and needs to be updated. - Recommendation: The BRSA should upgrade its supervisory review process of banks’ IRRBB management and internal economic capital calculation, challenging banks’ assessments. - Note: One foreign-owned bank announced it will implement IAS 29, financial reporting in hyperinflationary economies. ### Corporate governance and state-owned banks (SOBs) - Finding: Revisions to the corporate governance framework should be advanced to address shortcomings found in the last BCP assessment. - Recommendation: Standards must be applied equally to SOBs to ensure they adopt good risk management and underwriting practices and avoid creating market or systemic distortions (for example through non-commercial lending rates). ### ICT risk, cybersecurity, and operational resilience - Finding: The BRSA’s approach to ICT risk, covering cyber security and operational risk, is fragmented. - Finding: Cyber risks are well recognized; National Cybersecurity Strategies have been issued since 2013 and Türkiye enjoys a high ranking in the Global Cyber Security Index. - Finding: Financial sector regulators have tasks in the National Cyber Strategy of 2020 – 23 including: (i) implementation of cyber security regulations and audits; (ii) investigation of risks related to producer dependency in IT products used in critical infrastructure sectors; (iii) cyber security exercises; and (iv) information security awareness training for industry employees. - Finding: Digitalization has expanded the cyber-attack surface and the potential for financial instability. - Finding: Cybersecurity regulations are principles-based and outcome-focused; BRSA, CBRT and CMB regulations address outsourcing risk and third-party risk management, but gaps remain for non-banks (e.g., information sharing, cyber maps, stress testing). - Recommendation: Enhance regulatory coverage, consistency, and coordination; remove overlaps; and finalize the drafting of a cybersecurity law. - Finding: The FSC has not yet focused on cyber issues and should take responsibility to understand, identify and cooperatively act against systemic cyber risks. - Finding: Supervision for ICT / cyber risk is heavily dependent on external independent auditors; BRSA is not building its own specialized capacity and supervisory follow up is not integrated into mainstream supervision. - Recommendations to enhance effectiveness: - Address staff and resource constraints for cybersecurity preparedness; current issues include low staff numbers, high attrition, and declining proportion of experienced staff. - Integrate BRSA ICT / cyber risk assessments into the full supervisory process and consider them enterprise-wide. - Resume regular onsite assessment of ICT / cyber risks in banks (onsite supervision ended in 2016). - Leverage operational and cyber resilience data into offsite supervision to develop macro-level cyber maps, identify critical service providers, and strengthen information sharing. - Improve the frequency and effectiveness of testing arrangements: increase cyber drills and sector-wide exercises; harmonize and strengthen incident response arrangements. - Authorities’ view: The authorities concurred on the importance of strengthening cyber preparedness, highlighted recent initiatives, and considered ICT / cyber risk assessments sufficiently integrated—while the report notes gaps. ### Insurance and pension supervision - Finding: Insurance supervision and regulation have significantly improved with the establishment of IPRSA as a standalone insurance and pension supervisor. - Finding: IPRSA’s practices do not yet meet international standards; IPRSA should be provided with an objective, in law, to support financial stability. - Recommendations: Improve nomination, appointment, and dismissal procedures for IPRSA’s board members; increase frequency of on-site inspection; implement a formal ORSA process; adopt a groupwide supervisory framework given financial/conglomerate groups. - Finding: IPRSA’s creation left a vacuum in pension policy design and segregated regulatory and supervisory functions between the CMB and IPRSA; supervisory cycles are not necessarily aligned. - Recommendation: Remove fragmentation in supervision and policy making to move towards risk-based supervision. ### Systemic liquidity management and central bank operations - Finding: The overarching policy framework would benefit from refocusing on inflation stability and strengthening CBRT’s operational autonomy; current multiplicity of instruments and objectives has made the framework opaque. - Finding: CBRT liquidity has mainly been provided through quantity repo auctions with one-week maturity since the 2020 operational simplification; a 300-bps symmetric interest corridor was implemented. - Finding: Lack of clarity exists over which short-term market interest rate the CBRT uses as its operational target; CBRT intervenes on the BIST Repo and Swap Markets to smooth interest rate volatility. - Finding: The new TL reference rate is a more robust money market benchmark: it is a broad measure of overnight TL borrowing collateralized by government securities in the BIST repo market, transaction based with large daily volumes, and a risk-free rate as it does not include counterparty credit risk. Shortcoming: it captures CBRT’s interventions on the BIST. - Recommendation: CBRT should cease interventions on the BIST repo and derivatives markets and remove individual banks’ limits on monetary operations to enhance transmission of the main policy rate. - Finding: Reserve requirements (RR) in TL and FX are being actively used as prudential tools and increasingly for liquidity management in place of the policy interest rate. - Findings on RR measures: CBRT has varied the reserve requirement ratio on deposits converted from FX to TL; changed required reserve ratios on FX and TL deposits; applied a new commission fee for certain levels of non-converted FX deposits; adjusted remuneration rates; terminated the Reserve Option Mechanism; and in April 2022 applied reserve requirements on some corporate loans. - Finding: A complex constellation of measures shrouds transparency of policy settings and objectives, complicating policy transmission and risk pricing. - Finding: Given limited FX reserves, CBRT should restrict FX interventions to the most extreme cases of exchange rate volatility and build FX reserves over time to mitigate FX liquidity risks. - Numeric finding: The level of gross FX reserves is below the recommended 100-150 percent EM ARA metric and the net international reserves position is sharply negative after deducting FX swaps and liabilities. - Findings on reserve composition: Composition incorporates a higher proportion of gold and FX currencies not included in the SDR basket—these are obtained through bilateral swaps often linked to trade arrangements and not necessarily readily available to be drawn. - Recommendation: Funds owed to the banking sector must be clearly segregated and ring fenced to maintain CBRT’s fiduciary duty; scale back FX sales to Botas over time to allow FX market intermediation; consider designing a volatility-based FX intervention rule to dampen excessive FX volatility. - Recommendation: Finalize review of the emergency liquidity assistance (ELA) framework: include penalty pricing, expand eligible collateral, enhance monitoring for potential ELA usage, contingency planning, regular testing of procedures in coordination with BRSA and SDIF, and ensure processes to obtain government indemnity when ELA risks exceed CBRT’s own financial capacity. Redefine CBRT’s FX lending facility as ELA in FX. - Finding: CBRT’s own risk profile has increased through scaling up the government securities portfolio and bank refinancing; collateral eligibility was broadened to include riskier asset classes; haircuts were reduced on TL collateral pre-COVID but raised in mid-2022 on CPI-linked sovereign bonds; collateral rules for swap transactions adjusted to favor domestic government bonds. - Recommendations: Review collateral framework and recalibrate haircuts; mitigate interest rate risks by reducing duration and size of OMOs; mitigate exchange rate and interest rate risks from FX swaps and liabilities by adjusting currency composition and duration target of investment tranches. ### Authorities’ views (selected) - BRSA concurred with the majority of recommendations and noted some were already being implemented; in some areas (e.g., shareholding and fit and proper) they noted limited scope due to many banks being foreign or state-owned. - BRSA view: Outstanding extraordinary measures would be unwound once volatility permitted; they have a clear understanding of risks; supervisory framework works efficiently; banks are adequately supervised. - Liquidity: Authorities downplayed risk of deposit withdrawals, citing high market confidence and low interest rate sensitivity; FX liquidity risk is monitored closely. - CBRT view: Emphasized conducting independent monetary policy with inflation control as overarching objective; preferred not to specify which short-term market interest rate is the operational target; considered interventions on BIST repo and swap markets have limited effect on TL reference rate calculation. - FX reserves: Authorities saw level as adequate, focus on a range of metrics not ARA alone; confident in capacity to convert gold into FX; considered an FX intervention rule would remove flexibility; assured that FX required reserve assets were segregated. ### Financial integrity, AML/CFT - Finding: Türkiye was grey listed by the FATF owing to weaknesses in its AML/CFT framework; the FATF’s MER in 2019 noted deficiencies in technical compliance and effective implementation. - Numeric finding: In October 2021, the FATF placed Türkiye in the list of jurisdictions with strategic deficiencies (grey list) and provided a comprehensive action plan with timelines. - Finding: Inclusion on the grey list highlights risks to the financial sector and raises reputational risks; continued close monitoring is advised, including over correspondent banking pressures. - Progress reported: - Improvements to the legal framework, including for targeted financial sanctions for proliferating financing. - Adoption of a high-level National AML/CFT Strategic Plan. - Establishment of specialized courts for ML/TF cases. - A risk assessment for legal persons and a new registry to hold beneficial ownership information. - Undertaking a comprehensive national risk assessment to feed into AML/CFT framework improvements. - Increased resources for MASAK’s financial analysis and supervision work. - Remaining actions and recommendations: - Introduce enforceable legal measures and guidance for politically exposed persons (PEPs). - Approve the law on crypto assets to ensure full compliance with R.15. - Continue to demonstrate ability to implement targeted financial sanctions without delay and pursue domestic designations for TF. - Continuously monitor emerging risks and adopt mitigation measures. - Enhance supervision in line with Türkiye’s risk profile without diverting resources from other areas (e.g., banking supervision). - Produce comprehensive statistics to demonstrate effectiveness of financial intelligence, ML/TF investigations and cases. *Source: IMF country report content provided.* ### 124. Close monitoring, management, and mitigation of emerging risks as a result of the ### 1turea2023002 - 124. Close monitoring, management, and mitigation of emerging risks as a result of the ### Emerging risks, AML/CFT, and external pressures - Close monitoring, management, and mitigation of emerging risks as a result of the current geo-political context is warranted. - Specific risks to monitor: - The extraterritorial impact of bilateral sanctions against third countries. - Cross-border financial flows. - The presence of non-residents in Türkiye’s financial sector. - Financial integrity risks arising from Türkiye’s citizenship by investment (CBI) program, with supervisory efforts focused on sectors closely associated to the CBI program (e.g., real estate). - Regulatory and supervisory actions: - Raise financial institutions’ awareness of risks arising from possible cross-border regulatory actions. - Monitor progress on measures related to PEPs in line with the FATF’s Recommendation 12 (noted as a recommendation of the previous FSAP and now a requirement under the FATF’s action plan). - Diagnostic indicators cited: - "9 out of the 11 immediate outcomes ratings related to effectiveness were low or moderate." - Reference to FATF Jurisdictions under increased monitoring – June 2022. *Authorities’ Views* - The authorities have made a high-level commitment to meet the FATF’s action items, aiming to exit the FATF grey list expeditiously. - They consider the grey listing had not had a severe impact on the financial sector to date and are stepping up efforts to enhance the effectiveness of the AML/CFT framework. ### Crisis management and safety nets — institutional framework and recent reforms - Institutional coverage: - The bank recovery and resolution framework covers the SDIF as the resolution authority, BRSA, CBRT and the MOTF, and structures to facilitate domestic coordination. - Key legal and institutional strengths: - Laws contain many essential provisions, including corrective action powers and several resolution powers. - Recovery planning requirements for D-SIBs were introduced in 2020; BRSA has assessed the first round of submissions. - Restructuring of the FSC and re-establishing a working group on crisis management expected to improve inter-agency cooperation and crisis preparedness. - Deposit Guarantee Scheme coverage was increased to 200,000 TL and the scheme remains well funded. - As of end-September 2021, the size of the SDIF deposit insurance reserve was TL 80,537 million. - The deposit insurance limit provides full coverage to above 90 percent of natural person depositors. - The coverage ratio of the deposit insurance reserve to total insured deposits was about 8 percent. - Insurance pay-outs are made in TL. - Ongoing reform work: - Proposals for strengthening the Banking Law (BL). - Developing, enhancing and amending existing policies covering recovery planning, resolvability assessments, resolution planning, enhancing the resolution toolkit, and reform of resolution financing. ### Recovery planning, early intervention, and supervisory coordination - Recommended enhancements: - Consider making recovery plans mandatory for all banks operating in Türkiye, including subsidiaries of foreign banks. - Enhance information exchange between BRSA and SDIF during the use of early intervention measures (EIMs) and when assessing recovery plans once Banking Law amendments are made. - Enable the SDIF to start detailed preparations for resolution during EIM. - Share recovery plans with the SDIF for soliciting comments. - BRSA should strengthen its framework for early warning indicators and triggers for various EIMs and recovery options. - BRSA may benefit from stronger sanctioning powers and from developing procedures for situations where banks are under stress. ### Resolution regime: triggers, authorities, and toolkit gaps - Modalities for placing a bank into resolution require further clarification: - Trigger system for declaring a bank failing is relatively well developed but lacks important elements. - The non-viability assessment should be forward-looking to allow earlier entry into resolution. - Institutional role adjustments recommended: - Move the power to decide whether a failing bank should be put into resolution or liquidation from BRSA to SDIF as the resolution and liquidation authority (after BRSA decides that the bank is failing or likely to fail (FOLTF)). - Empower SDIF to undertake resolvability assessments, draft resolution plans, and develop a policy framework in close cooperation with BRSA. - Consider empowering SDIF to proactively request FOLTF decisions. - Enable SDIF to remove obstacles to bank resolvability and ensure resolution is a credible option for all failing banks, including SOBs. - Missing resolution tools and legal features: - Toolkit missing bridge bank and good-bad asset separation powers. - Introduce a temporary stay of contractual acceleration, termination and other close-out rights to avoid termination of large volumes of financial contracts upon entry into resolution. - Enhance existing moratoria powers. - Provide tools for pre-packed transfer of selected assets and liabilities to a purchaser for all banks regardless of systemic relevance or SDIF shareholder status. - Bridge bank power would enable operational continuity of a failed bank’s critical functions on an interim basis if a buyer cannot be immediately identified. - Legal framework should provide SDIF with clearly defined statutory resolution objectives and accountabilities. ### Loss-absorbing capacity, funding, and bail-in considerations - Current funding practice: - SDIF funds (combined with government backup funding) are the only available source of resolution funding to stabilize and recapitalize a failed bank. - Recommended reforms: - Introduce the principle of private loss coverage in accordance with the liquidation hierarchy in line with the FSB KAs, while ensuring creditors are protected under the “no creditor worse off” safeguard. - Assess the most appropriate way to introduce bail-in conversion powers. - Enable SDIF, in consultation with BRSA, to request banks to increase their loss-absorbing capacity and to convert or write down liabilities upon entry into resolution. - Apply open bank bail-in only to D-SIBs with viable business prospects to restore commercial viability. - Ensure the legal framework contains strong investor protection for retail investors while building sufficient loss absorbing capacity over time. ### Crisis coordination, contingency planning, and cross-border arrangements - Role of the Financial Stability Committee (FSC): - FSC should play a leading role in contingency planning and crisis preparedness; legal provisions should be amended to make this clearer. - FSC’s operating principles should distinguish between its role in normal times and in potential crisis times. - FSC should coordinate the development of contingency plans in each member authority for integration into a national plan. - Governance and cross-border cooperation: - Review legal arrangements to ensure effective operational autonomy of the SDIF and BRSA, subject to robust transparency and accountability. - There are currently no substantive cross-border coordination arrangements for cross-border bank recovery and resolution. - Authorities need to address cross-border resolution for subsidiaries and branches both as a home and a host country when revising the legal framework. - A major hurdle to cross-border cooperation is the SDIF’s lack of powers to share bank-specific information with foreign authorities; a memorandum of understanding is recommended. *Authorities’ Views* - Authorities agree work remains to align crisis management and bank resolution with international best standards, particularly the FSB KAs. - Noted measures: introduction of recovery planning for DSIBs, on-going strengthening of relevant laws, and re-establishment of the crisis management and resolution subgroup within the FSC. - Authorities express caution on limitations to the use of SDIF funds and on private loss absorption, including the bail-in option, and see less urgency to broaden recovery planning requirements to all banks. ### Financial sector development — capital markets and green finance - Capital market development reforms and constraints: - Reforms introduced to support capital market development, but lack of enabling conditions remains a challenge. - Constraints include: lack of sound price formation, deeply negative real interest rates, market volatility, frequent and unpredictable regulatory changes, and the dominance of banks and their favorable funding position. - Important reforms include: - Improving the institutional framework for pension and investment funds. - Lowering over time the reliance on sovereign FX debt issuance while defining the TL bond benchmark size, reducing fragmentation and lengthening maturities. - Streamlining and stabilizing the tax framework for capital markets. - Green finance market status and recommendations: - Green finance markets are small with low levels of green debt issuance and limited involvement of local investors. - Barriers to scaling up green finance: - Limited capacity in the financial sector to integrate climate aspects in operations. - Lack of transparency of climate risks and opportunities. - Limited incentives and guidance to stimulate green finance. - Recommended measures: - Develop a fully-fledged national climate finance strategy. - Establish a comprehensive climate information architecture (green taxonomy, which should be aligned with the EU for maximum utility). - Create incentives for the issuance of green bonds and investor participation. *Italic line: extracted from the provided IMF chapter content.* ### 137. Increased digitization can further contribute to improvements in financial inclusion ### 1turea2023002 - 137. Increased digitization can further contribute to improvements in financial inclusion ### Key findings on financial inclusion (2021) - 72 percent of adults in Türkiye had an account. - 16 percent of adults had a mobile money account. - The financing gap for micro, small and medium enterprises remains significant. - Women and the bottom 40 percent by income had significantly lower levels of financial inclusion. ### Role of fintech and policy stance - Authorities recognize that fintech can play an important role to promote financial inclusion and efficiency and have embarked on various initiatives to create a safe, enabling environment. - Fast-paced fintech developments call for a robust supervisory and monitoring framework. - The CBRT is studying the potential risks and benefits of a Central Bank Digital Currency (CBDC). ### Implications and policy priorities - Strengthen supervisory and monitoring frameworks to keep pace with rapid fintech developments. - Design regulatory and operational initiatives that target the persistent financing gap for micro, small and medium enterprises. - Prioritize measures to raise financial inclusion among women and the bottom 40 percent by income. - Assess carefully the risk–benefit profile of a possible CBDC as part of broader digitization and financial inclusion strategies. *Source: IMF staff summary of section 137 from the provided IMF chapter.* ### Appendix I. Stress Testing Approach ### Appendix I. Stress Testing Approach ### Banking sector: Solvency Stress Test - Institutional perimeter - The 10 largest Turkish banks (four state-owned deposits bank and six private banks), to cover at least 80 percent of banking system assets. - Methodology and risk drivers - Scenario-conditional forecasts of various drivers underlying headline capitalization metrics were combined, including credit risk (through loan loss provisions under IFRS9), interest rate risk (through interest income in the banking book, interest expense for deposits and wholesale funding, mark-to-market revaluation of bond trading portfolios), and foreign exchange-rate risk (by looking at the impact of exchange rate shocks on banks’ net open positions). - Dynamic balance sheet approach: gross exposures (loans and debt securities, excluding CPI linked securities) as well as deposits are assumed to grow in line with nominal GDP growth for all banks. - The hurdle rate adopted is the minimum regulatory requirement for total capital adequacy ratio of 8 percent for all banks. Capital buffers are not included in the hurdle rate. - Scenarios - Baseline scenario aligned with preliminary July IMF WEO. - Bespoke adverse scenario addressing the most relevant risks and vulnerabilities confronting the financial system, including aspects of the COVID-19 pandemic, sharp rise in global risk premia, exchange rate depreciation, FIs’ funding cost pressure, etc. - 3-year horizon. - Forbearance measures and counterfactual analysis - Exclusion of the impact of forbearance measures (FX rate fixation for credit RWA, mark-to-market losses for fair value through other comprehensive income (FVOCI) securities exclusion from capital and loan classification flexibility) from bank-level starting points. - Risk weights on sovereign debt securities in FX, and FX required reserves and receivables from the CBRT were increased to 100 percent, in line with Basel. - Counterfactual analysis on restructured loans. ### Banking Sector: Liquidity Stress Test - Institutional perimeter - The largest 10 Turkish banks (four state-owned deposits bank and six private banks), to cover around 80 percent of banking system assets. - Methodology and scenarios - A cash flow-based liquidity stress test (LST) and a Basel III-Liquidity Coverage Ratio (LCR) test were conducted to assess banks’ ability to cover net cash outflows using their counterbalancing capacity. - Scenario’s analysis to cover risks from: (i) asset price falls, (ii) run on retail deposits, (iii) run on wholesale funding, (iv) foreign and domestic investors different behavior, (v) run on FX deposits, (vi) scarce access to FX funding, for example via swaps with the CBRT. - Bank-level LCRs as of end-2021 adjusted to: (i) cap the aggregate banking sector’s FX reserves held at CBRT counted as HQLA to the CBRT’s readily available FX liquidity; (ii) impose 35 percent haircut on Türkiye sovereign debt in FX; (iii) remove FX inflows (as well as TL outflows) from swaps with the CBRT. - Account for different currencies: Turkish Lira and FX. ### Corporate Sector Stress Test - Institutional parameters and coverage - Institutions included: All publicly listed nonfinancial firms (over 300 firms covering ≈25 percent of the market share). - Access to unlisted large and medium firms was not granted by the CBRT’s statistics department. - Data - Data on publicly listed firms sourced from commercial data sources (Mainly from FINNET and S&P Capital IQ). - Data availability on FX assets and liabilities, maturity structure of FX debt, on-and-off balance sheet FX hedges was discussed with the CBRT during the first mission. Granular information on FX exposures (apart from FX assets, liabilities) is currently not in a form suitable for stress testing purposes. - Methodology and risk drivers - Scenario-based forecasts of various income statement and balance sheet line items. Similar to bank solvency stress tests, NFC stress tests project firms’ net income, viability, and debt service capacity under baseline and adverse scenarios. - Firms profit and loss items are linked to macrofinancial variables through regression analyses and forward-looking projections were derived using scenario variables spanning through the stress testing horizon. - Calibration of interest rate shocks, FX shocks, credit shocks. - Risks absorbers/hedging will be proxied through exports revenue, FX assets, off-balance sheet hedges such as derivatives. - Scenarios and horizon - Number of scenarios: Baseline, and Adverse scenarios in line with the bank solvency stress testing. - Horizon: Three-year horizon in line with the bank solvency stress testing. - Reporting format for results - Median results: - Impact on viability (ICR) ratios - Debt-at-Risk measure - FX risks ### Interconnectedness Analyses and Systemic FX Liquidity Stress Test - Institutional parameters and coverage - Domestic exposure-based bilateral interconnectedness include bilateral exposures between Turkish banks (same sample as in bank ST). - Exposure-based bilateral cross-border interconnectedness between Turkish banking system and other large banking systems. - Systemic FX liquidity stress testing performed at domestic sector level. - Data - Bilateral on-balance sheet and off-balance sheet exposures as of end-2021 for the domestic bank interconnectedness/contagion was provided by the BRSA. - Confidential and publicly available BIS bilateral locational and consolidated exposures vis-à-vis other banking systems were used for the cross-border interconnectedness/contagion analysis. - Systemic FX liquidity stress tests utilized supervisory data provided by the BRSA on contractual cashflows, BRSA’s granular derivatives exposure by counterparty and maturity, and publicly available data coming from authorities. - Channels of risk propagation and methodology - Contagion analyses (both domestic and cross-border) were performed based on Espinosa-Vega and Sole (2010), which allows default cascade simulations at different loss given default (LGD) rates (LGDs ranging from 10, 25, 50, 75, to 90 were used). - Systemic FX liquidity stress test uses two rounds of effects at a stress test horizon of 1-month. - First round: scenarios in line with cashflow-based bank liquidity stress test. - Second round: additional impact due to corporate vulnerabilities resulting in liquidity gaps (estimated through the NFC stress tests), as well as additional funding needs of other sectors (e.g., Gov) if external funding is constrained. - Separate sensitivity analysis assessed the impact of capital flight outside of the domestic banking systems. - Reporting format for results - Contagion analyses show systemic-wide capital shortfalls (with min, max, median without identifying individual institutions or jurisdictions). - Interconnectedness analysis is assessed by illustrative network maps. - Systemic FX liquidity stress tests report the impact of moderate-to-large outflows and capital flight on CBRT’s readily available FX liquidity (though bar charts). *Source: Appendix I. Stress Testing Approach* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1turea2023002.pdf_