Turkey's Banks Put on Dollar Diet

Turkey’s central bank is trying to take away the cookie jar.

The country’s banks have been gorging on short-term U.S. dollar funding in the past couple of years because it is so much cheaper than borrowing at home. The central bank is trying to push banks towards a healthier funding diet by increasing the percentage of short-term liabilities that they must hold as reserves.

From February, the banks must hold at the central bank 18% of their foreign-currency funding that runs for less than a year. That is up from 11% now. Reserve requirements have increased slightly for two-year money, but been cut slightly for three-year money.

Turkish banks almost quadrupled short-term foreign currency funding - from $25 billion to $98 billion – from 2009 to last October, the latest data available. Short-term foreign money accounts for 14% of all liabilities and all foreign funding accounts for more than 40%.

Turkey, along with India, is one of the few emerging markets expected to benefit from falling energy prices. However, unlike India, it is susceptible to a stronger dollar – unless it can stop its banks and other borrowers from behaving like cookie monsters.