Turkey to restore state banks' capitalization to pre-election level

Reuters

Turkey is reducing the limit on state banks' usage of special government bonds issued for capital increases to former levels, in the latest step to reverse unorthodox economic policies used before the 2023 general elections.

Under the draft 2025 budget recently submitted to parliament, the limit for issuing special issue government domestic debt securities on loan is being reduced from three percent of budget appropriations to the former rate of one percent.

The higher rate had been used before the 2023 presidential and parliamentary elections to enable state banks to be capitalized and provide loans cheaper than market conditions.

The latest move will reduce the additional capital or special bond issuance that supports banks' equity. The main state lenders are Ziraat, Vakıfbank, and Halkbank.

Since mid-2023, the Treasury and central bank have either removed previous economic policies or brought regulations back in line with their former structure in a policy U-turn towards greater orthodoxy.

The special bond issue is a type of security issued to increase capital in public banks. The banks buy this security and lend money to the Treasury. The Treasury then lends this money to the Wealth Fund, and the Wealth Fund lends it to public banks.

The Turkish Wealth Fund provided a total of 111.7 billion liras ($3.26 billion) of capital support to public banks through special issue government domestic debt instruments issued by the Treasury in March 2023.

"This limit for public banks to provide loans cheaper than market conditions was raised before the elections. Now it is being pulled back to old levels. We evaluate this within the scope of normalization," another banker said.