Gold Deposits Could Meet Credit Demand

November 22, 2012 at 09:16

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Although much criticised for its use of “unconventional measures”, few would argue that the decision last year by Turkey’s central bank to allow the country’s banks to buy gold was anything less than a roaring success.

Beginning in October 2011, the CBT has allowed banks to hold part of their reserve requirements in gold, while at the same time allowing them to collect the gold themselves.

 The rationale is straightforward. With many Turks historically preferring to invest their wealth in physical gold rather than more traditional banking instruments, analysts estimate there may be as much as 5,000 tonnes of gold being held “under the pillow” in the country.

These investments, which are effectively held outside the economy, could be converted to bank deposits while simultaneously allowing banks some leeway on their reserve requirements.

Initially set at 10 per cent of reserve requirements, the level has been successively raised to its current 30 per cent as the policy has succeeded in attracting gold back into the economy with high street banks initiating open “gold days” – when anyone holding gold can trade it in for a replacement investment in a “gold deposit account”.

The effect has been dramatic, with Turkey’s banking regulator reporting an increase in the banking sector’s collective precious metal account rising from TRY1.8bn ($1bn) in September 2010 to TRY15bn by September 2012 and individual banks reporting gold collections measured in tonnes.

But the initial rush of interest appears to be slowing, with Is Bank, Turkey’s biggest high street bank, telling the Financial Times that it expects to collect only $50m in gold deposits by the end of 2012.

Similarly, doubts have surfaced over just how much gold is likely to be available for deposit.

Speaking earlier this month, Erdem Basci, governor of the CBT, estimated Turkey’s “under the pillow” reserves at being about 2,200 tonnes or about $12.2bn at current prices.

With the figure apparently based on recorded gold sales over the past three decades, analysts point out that it fails to account for “heirloom gold” already in circulation and passed down through families, suggesting the true figure could be as much as 5,000 tonnes.

Whatever the true figure, opinions differ as to how much of that gold might be available for deposit in the banking system.

Can Demir, banking analyst at Renaissance Capital, says much of the “under the pillow gold” is jewellery with cultural traditions mitigating against it being banked to be melted down for bullion. A better measure of how much gold is available for banking would be the weight of Turkish gold coins in circulation, he explains. “They are produced only for saving, they have no other use,” he says.

But, with the state Darphane mint having already produced 39 tonnes of gold coin in the first nine months of this year, the same as it produced in the whole of 2010, questions remain over how much of this gold is likely to be banked. And over what banks will do with the gold they collect, with utilisation of the central bank facility for swapping bullion for lira reserves approaching capacity.

“Unless the cap is raised it’s difficult to see what else banks can do with the additional gold, because the current gold deposits can be utilised at the CBT anyway,” says Mr Demir. Raising that cap and attracting further gold into the banking system would free up a tranche of lira liquidity.

“It will open up a sizeable savings pool which the banks would be able to extend as credit,” says Inan Demir (no relation), chief economist at Turkey’s Finansbank.

With loan growth in Turkey static extra liquidity is not an issue, but with analysts predicting the Turkish economy growing faster in 2013, many are anticipating increased demand for credit, which could be met by increased gold deposits.

But the benefits for the banking system of buying up Turkey’s “under the pillow” gold, are not confined to reserve requirements and credit pools. It also serves to increase the level of bank savings in Turkey which, according to World Bank figures, fell from 23.5 per cent of GDP in the mid ’90s to 12.7 per cent by 2010.

“The ratio of assets in the financial system to GDP is only a quarter of that of the EU average,” says Suzan Sabanci Dincer, chairman of Akbank, adding that with 19m Turkswithout bank accounts, there is still plenty of room for the sector to grow.

But, with the easing of Basel II capital adequacy ratios and the scarcity of capital since 2009, banks are trying to generate non-capital consuming business opportunities through cross marketing rather than be restricted to savings accounts, explains Can Demir, pointing out that buying gold is a way of reaching out to Turks who have never set foot inside a bank.

“If you have a good gold deposit product, then once you initiate the relationship with the customer, you have the opportunity to sell them credit cards, mortgages and other products.”