Turkish Central Bank lowers reserve option coefficients

Turkey's Central Bank has lowered its reserve option coefficient, a move that will provide approximately $620 million of liquidity to the country's financial system.

According to the bank's statement issued yesterday, the coefficients for the second, third and fourth tranches of the foreign exchange facility of the Reserve Option Mechanism have been decreased by 0.2 points.

"Should the reserve option utilization rates remain unchanged, approximately $620 million of liquidity will be provided to the financial system with these changes," it said and added, the increase in foreign exchange reserve requirement ratios will add over $2.9 billion in liquidity to the Turkish financial system.

The bank also said it had raised the upper limit of foreign exchange reserve requirements to 4 points from 3 points to facilitate the foreign exchange liquidity management of banks.

"In addition, upper limit of the FX [foreign exchange] reserve requirements that can be maintained as average has been increased to 4 points from 3 points in order to facilitate FX liquidity management of banks. With this amendment, banks will be able to freely use an additional amount of approximately $2.9 billion to meet their FX liquidity needs within the maintenance period," the statement said.

The Central Bank's move came after the Turkish lira slipped to a historic low against the U.S. dollar, which dropped to 3.1270 Friday, amid growing expectations that the U.S. Federal Reserve would raise interest rates in December.

According to a Turkish Central Bank report, the Reserve Options Mechanism is a tool unique to the Central Bank to hold foreign exchange or gold reserves in increasing tranches in place of Turkish lira reserve requirements of Turkish banks. It is aimed at supporting the country's foreign exchange reserve management of the banking system and limits adverse effects of excess capital flow volatility on the macroeconomic and financial stability of Turkey.