Shares of Turkish lenders surged, while the Turkish lira plummeted, after the central bank began to loosen the rules that were put in place to support the currency. The move marked a part of the central bank's process of a gradual policy shift aimed at restoring economic credibility. As of 12:01 p.m. in Istanbul, the Borsa Istanbul Banks Index, which tracks the shares of Turkey's listed lenders, climbed 3.4%. Meanwhile, the lira weakened against the dollar.
A bit-by-bit approach to curbing unconventional policies is seen as a boon to the lenders whose balance sheets have been overwhelmingly made up of low-yielding government bonds. The banking gauge, which has gained 41% since May 24, compared with a 29% jump in the main BIST 100 Stock Index, suggests that Turkish policymakers are on the right track to restoring the country's economic health.
Last week, hopes for easing the requirements set forth by the central bank had helped drive a rally in banking stocks. The new Governor Hafize Gaye Erkan took the first step in simplifying policies designed to encourage savings and lending in the local currency by lowering the "securities maintenance ratio" to 5% from 10%. The central bank also cut the threshold for the share of lira deposits to 57% from 60%, according to a decree that was published in the Official Gazette on Sunday.
While the central bank's latest tweak is less than what investors hoped for, the market is focused on the good news as it represents a turning point in the way unconventional regulations that pressured banks are unwound. Nonetheless, the Turkish lira weakened 3.1% per US dollar, extending losses from last week after Turkey’s Treasury and Finance Minister Mehmet Simsek insisted on a gradual shift in policies.
Looking at the market metrics, the 10-year benchmark dollar bond yield increased one basis point to 8.87%, whilst the five-year CDS increased two basis points to 514bps. Meanwhile, the Borsa Istanbul 100 Index surged 1.9% to 5,687 points and the US Treasury's 10-year bond yield slid three basis points to 3.71%. Brent crude also saw a slight increase of 0.2% to $73.96 per barrel.