ISTANBUL, Nov 28 (Reuters) - Turkey's central bank is considering setting up an early warning system to avert the risk of cheap foreign borrowing feeding a credit bubble, according to a central bank document seen by Reuters.
It may consider imposing stricter reserve requirements on banks deemed too highly leveraged from 2014 if it sees such problems developing, the document shows.
The central bank has been performing a delicate balancing act this year, trying to reinvigorate a slowing economy while preventing loan growth fu elled in part by a surge in global liquidity fro m getting out of control and stoking inflation.
Expectations that Turkey could soon join benchmark investment grade bond indexes, if a second ratings agency follows Fitch's upgrade earlier this month, has increased the risk of destabilising inflows of foreign cash.
According to a presentation sent to Turkish banks and seen by Reuters, the central bank is considering imposing higher required reserve ratios on banks whose leverage ratio - a measure of their capital against total assets - is 3 percent or below.
The aim would be to ensure that banks are funding loan growth from deposits, rather than building up a dangerous dependency on the cheap money that major central banks in the United States and elsewhere have been injecting to try to reinvigorate their economies.
Turkey's last banking crisis in 2001, in which its currency weakened so sharply that Turks needed 1.65 million lira to buy a single dollar, prompted the country to recapitalise its banks and introduce tighter regulations.
Banking sources said the central bank would monitor lenders during next year and would start applying the higher ratios in 2014 if any bank appeared to be too highly levered, part of an early warning system to guard against overheating.
"This is a new tool ... The central bank is signalling to banks that it wants them to have a high leverage ratio as it expects an expansion in their assets in the period ahead," one of the banking sources said.
"The central bank is asking banks to increase their lending by strengthening their capital but not by borrowing. It just doesn't want to see a loan expansion based on borrowing. All banks will have to be on their guard," he said.
According to the presentation, the central bank may add 1-2 percentage points onto its reserve requirement ratio for banks with a leverage ratio below around 3 percent from 2014, and potentially below 5 percent by 2016.
It currently applies a required reserve ratio of 11 percent on banks' lira deposits with a maturity of up to 3 months.
FOREIGN BORROWING BOOMS
In its bi-annual financial stability report, released on Thursday, the central bank hinted at an increased focus on bank leverage, saying stronger ratios were "important for the establishment and sustainability of financial stability".
"For us the big picture is important - loan growth and how this loan growth is financed, how much through deposit growth and how much with non-core liabilities," Turalay Kenc, who sits on the central bank's monetary policy committee, told Reuters at a conference in Istanbul this month.
Turkish banks are on track to issue around $8.5 billion in foreign bonds this year, more than double their borrowing abroad last year. The surge is likely to continue in 2013, particularly if the country receives another ratings upgrade.
The average leverage ratio among its more than 40 banks is 7.6 percent, though some are more highly levered than others. Only one has a leverage ratio of below 3 percent.
"Currently we are talking about 12-13 banks in the whole sector with a leverage ratio below or at five percent. The major banks are way above this," a second banking source said.
"The central bank would ask them to adjust their borrowing and loan growth ... or face a penalty. So they have a strong interest in increasing their leverage ratio."
Turkish banks have been borrowing dollars at rates as low as 1.5 percent on the repo market and parking them with the central bank as reserves, while lending lira to consumers at interest rates of up to 10 percent.
The central bank has managed to reduce annual loan growth to around 15 percent so far in 2012, from 29.5 percent last year and 34 percent in 2010, by gradually increasing banks' funding costs and thereby draining liquidity.
While it wants a certain level of loan growth to stimulate flagging domestic demand, too sharp an expansion would stoke inflation, increase Turkey's import bill and widen an already gaping current account deficit, its main economic weakness.
"There's nothing wrong with the current trend, but they're being cautious. They want to position the banking sector better against capital inflows," the first source said.
Turkey's current account deficit stood at $77 billion, 10 percent of output, in 2011. The government expects it to fall to $60.7 billion in 2013. Inflation stood at 7.8 percent in October, far above the bank's year-end target of five percent. (Editing by Nick Tattersall/Ruth Pitchford)
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