Banks have bond humps on their backs

USAOne of the reasons for the failure of Silicon Valley Bank (SVB) was the depreciation of its bond portfolio due to interest rate hikes. The US Federal Reserve (Fed) has been pursuing an aggressive policy of raising interest rates since last year to deal with inflation. This led to the depreciation of bond-like financial assets, such as US bonds. Faced with the resulting weak liquidity and insufficient solvency, the SVB suffered huge losses during the bond sale process and was ultimately bankrupted. As the US was rocked by the biggest bankruptcy in the last 15 years, Turkey also focused on banks that had accumulated ‘mandatory’ bonds on their balance sheets.

77 PERCENT OF BANKS

According to the Central Bank (CBRT) data, TL 2 trillion 667 billion, or 77.5 percent, of the total bond portfolio of TL 3 trillion 437 billion in terms of market value is held by the banks. Because economic management forces banks to buy government securities (GDDS) subjecting them to many regulations. Banks currently have to buy bonds in exchange for the foreign currency deposits they hold and the business and personal loans they make. With the bonds that banks have to buy, interest rates on bonds have been falling since last year. However, economists point out that government bonds in banks’ portfolios may become a big risk in the banking system with possible future interest rate increases.

Kerim Rota

Can become a risk over time

Experienced banker Kerim Rota said that in the event of an increase in interest rates on TL bonds in the future, banks can easily cover this loss with their existing capital reserves. However, he also drew attention to the risk of irreparable damage occurring and spreading to the sector over time. Rota said: “The government has long wanted to manage rates and interest rates within the target band. They are trying to reduce interest rates on loans, but access to loans is becoming more difficult every day,” he said.

Bonuses stack up with financial pressure

Kerim Rota, Head of Economic Policy for the Future Party, claimed that economic management forced banks to buy bonds with interest rates well below inflation, with ‘financial suppression’, and that banks were forced to invest in Treasury bonds with a maturity of less than 5 years, well below inflation. Rota said that as of January 2023, 17 percent of Turkish banks’ assets consisted of bonds and bills. Rota reported that the ratio of TL-denominated bonds and bills to assets, which will create significant interest rate risk, is 9 percent.