The Turkish Development Bank (TKB) is to issue TRY3.15bn (€5.3bn) worth of asset-backed papers based on mortgage-backed securities to be issued by state-owned lenders Ziraat Bankasi, Halkbank and Vakifbank and private lender Garanti Bankasi, according to a prospectus seen by BloombergHT on November 29.

Sceptical observers responded to the development by raising the alarm at what they saw as a securitisation and potentially subprime risk transfer scheme to generate liquidity for lenders amid Turkey’s currency crisis and credit crunch.

The prospectus for the papers was reportedly sent to qualified investors.

TKB will execute the issuance via its recently-established wealth management fund, namely Turkiye Kalkinma ve Yatirim Bankasi A. S. Varlik Finansman Fonu.

Each state-owned lender is to contribute to the issuance with TRY1bn, while Garanti Bankasi will contribute with TRY150mn.

Halkbank is to put forward its TRY15bn mortgage loans pool as collateral against its TRY1bn issuance while Ziraat Bankasi will provide its TRY14bn mortgage loans pool and Vakifbank its TRY13.2bn mortgage loans pool as collateral.

Garanti Bankasi is to put forward its TRY8.7bn mortgage loans pool as collateral against its issuance of TRY150mn.

Vakifbank and Garanti are set to issue their securities on November 30 while Ziraat Bankasi and Halkbank will go ahead with its issuance on December 7.

Fercan Yalinkilic of Bloomberg explained how the “much-talked about plan to provide liquidity to local lenders” would work in a Twitter thread, stating: “1) Four lenders will sell their mortgage portfolios to TKB, 2) TKB will issue asset-backed securities (ABS) worth TRY3.15bn… based on those mortgages to investors, 3) Buyers of ABS will collect coupon payments (based on 5-year government bond yield on the issue date plus 80bp premium) and also redemption at maturity from TKB, 4) TKB collects the mortgage payments 5) If house owners pay mortgages on time and government yields go down, TKB makes handsome profit, 6) Profits of TKB also depend on the average interest rate on mortgage loan portfolio as well, 7) If mortgage payers fall back on their payments and/or 5year yields go up TKB's profit drops or might incur loss, 8) TKB is state owned, so ABS coupons get paid.”

Deepening of financialization
“#Securitization & #risktransfer are now two components of Turkey’s new rescue mechanism. Shocking to see that government is planning to deepen #financialization as a response to the crises of #DependentFinancialization,” Umit Akcay of the Berlin School of Economics and Law said in a response to Yalinkilic’s thread.

Well-respected investigative journalist Cigdem Toker, a nominee for Reporters Without Borders’ Press Freedom Awards this year, drove the latest red-hot debate on the Turkish markets after she published on November 28 in her column for daily Sozcu an official document signed by Turkish banking watchdog (BDDK) head Mehmet Ali Akben.

Toker’s column was headlined “Grand operation for economy” with the subheading of “We are publishing construction sector bailout plan”.

According to the document sent on November 21 to local lenders, the BDDK allows local lenders to assign a 0% risk weighting to the asset-backed securities included in their portfolio.

TKB has received approval from the Capital Markets Board (SPK) to sell up to TRY3.25bn worth of asset-backed securities to qualified investors without holding public offerings, according to the SPK’s latest regular weekly bulletin published on November 23.

Turkish lenders will be allowed to exchange their zero-risk securities with the government bonds they previously provided to the central bank as mandatory collateral, Toker wrote, adding that public lenders will later sell the government bonds in question on the secondary market and that they will have then accessed the required liquidity to feed the dried-up domestic market amid a severe credit crunch.

As a response to growing speculation, Turkish banking association TBB issued a written statement on the afternoon of November 29 saying that the covered bonds derived via loan-backed securities would be beneficial as a step to diversify sector tools and create “additional liquidity”.

Banking sector has the “necessary reserves”
The provision of central bank liquidity in connection with these covered bond issuances has not moved on to the agenda, the association also said, adding that the banking sector has the necessary reserves, liquidity and assets to secure liquidity, Reuters reported.

Denizbank CEO Hakan Ates also welcomed the recent moves by the SPK and the BDDK. Securitization of long-term loans provided to state-guaranteed projects along with mortgage loans would help the Turkish banking industry allocate more funds to finance infrastructure projects and other sectors, Ates said during a televised interview on BloombergHT.

Securitization of loans provided to state-guaranteed projects subject to international arbitration could also be sold abroad, Ates also said, adding that the Turkish banking industry has already provided $100bn worth of long-term loans, including $50bn to the energy industry.

International market conditions were not presently favourable for long-term borrowing and the lenders could use the liquidity raised through loan-backed securities to open fresh loans, according to Ates.

Turkish lenders redeemed $26.2bn worth of external debt across January-September versus fresh foreign borrowing of $20.7bn, Hakan Ozyildiz, former deputy undersecretary of the Treasury, tweeted on November 27, adding: “If the lenders are net debt payers, it means they cannot provide new loans”.

Past episodes
Ibrahim Turhan, a former central bank deputy governor and a former chairman of the Istanbul stock exchange, on November 29 tweeted a photo showing part of an article he wrote in 2010, stating: “Historically, as in present times, demands to limit the independence of central banks have come not only from politicians, but also from the financial sector, other market-players and the business world, all of which seek to benefit from the short-term effects of monetary policy. When examining past episodes, we can see that certain developments and economic conditions have garnered public and political support for such proposals to limit independence and have led to compromises in terms of central bank independence. Among these are: (1) political tensions and time of war; (2) periods in which protectionism was on the rise and policy-makers endeavoured to artificially maintain unsustainable economic imbalances engendered by structural weaknesses; and (3) the end of irrational financial euphoria and deflating financial bubbles.

“Past experiences have shown that refraining from central bank independence and attempting to change real variables through monetary policy only amplifies problems and deepens crises: covering out-of-control public spending through central bank resources leads to hyperinflation in the long run, and efforts to solve recessions caused by real or structural setbacks through counter-cyclical monetary policies lead to more instability. As Friedman (1953) has warned, using monetary policy to correct imbalances that should be dealt with by means of fiscal policy in order not to upset voters causes foreign exchange crises, and supporting asset price bubbles with monetary policy leads to moral hazard and adverse selection, thus helping systemic financial crises grow.”

Turhan pointed to simple formulas of the Quantity Theory of Money in comments directed at “the ones who think of the central bank for accepting securities based on private sector assets derived via mortgage loans” in another tweet mentioning the Turkish central bank's Twitter account.

Turkey's banking sector loans fell by 8.3% to TRY 2.46 trillion as of November 23 from as high as TRY2.69tn as of August 10, the central bank’s regular weekly bulletin showed on November 29.

Weighted average interest rates (WAIR) on lira-denominated consumer loans (personal+vehicle+housing+real person overdraft account) fell to 32.26% as of November 16 from 32.64% as of November 9, according to the latest data from the central bank. The rate stood as high as 32.9% as of October 26, and was at 21.05% at the end of June and 20.22% at the end of March.

WAIR on commercial lira loans fell sharply to 26.44% as of November 16 from 31.88% as of November 9. The rate stood as high as 35.94% at end-September, and was recorded at 23.52% at end-June and 17.88% at end-March.