Central Bank of Turkey - Case Study Example

Central Bank of Turkey CBRT History of Central bank of Turkey: During control of Ottoman, funds, dealers of jewelry, moneylenders, organizations and associations carry out the assets actions, currency matters and gold trade and foreign currencies through different levels. In 1847, Galata Bankers was allowed by the Government to establish the "Bank of Dersaadet" as a bank for the first time that assumed the external payments of the Ottoman Empire. In 1856 the "Ottoman Bank" was established jointly with French and English capital and in 1863 it became the state bank under the name of "Imperial Ottoman Bank". Imperial Ottoman Bank was enjoying the right and monopoly of issuing banknotes. This Bank was now able to collect the State revenues, the payments of the Treasury and discount Treasury bills too. The interest and principal payments regarding domestic and foreign debts would be made by Ottoman Bank. The total capital of the Bank consisted of 135.000 shares. The 80.000 of capital was bought by English Group, and 50.000 by French Group, while Ottomans had 5.000 shares. (Zürcher, 2004) The period of benefit of the Ottoman Bank was extended by Republican administration until 1935. But since 1926, the preparations were done to set up a central bank. The Bank was first established on October 3, 1931 and then the central bank was officially opened on January 1, 1932. (Zürcher, 2004) From the Turkey legislatures and laws, the essential purpose of the central Bank was to hold financial growth of Turkey. The Bank had to fulfill following duties for completing this aim: 1. Setting rediscount ratios and regulating money markets 2. Executing financial operations 3. Taking joint steps along with the Government in order to save the rate of Turkish currency. (Zürcher, 2004) With the opening of financial progress plans in Turkey in the 60’s, many amendments were prepared in the Laws of the central Bank. On 26th January 1970, laws were remade in order to state the tasks and errands of the Central Bank of Turkey so that implementation of the currency policy within the structure of progress plans could be done. In mid of 1980s, the Bank launched interbank money market, foreign exchange money market and made open markets operational. (Zürcher, 2004) In 1990’s, the bank introduced its new monetary programs. The Central Bank declared that its price rises mark would be in the array of seventy percent for and that the estimated inflation rate would be conducted in accordance with exchange rate and monetary policy. The main attribute of the monetary program was that the rate of increase in reserve money would remain in the range of eighteen to twenty percent especially in 1998. The enlargement of preserved money was to approach mostly from the increase of overseas trade resources. This policy resulted in increase in foreign exchange and interest rates. Moreover, in mid of 1990’s, CBRT introduced Macroeconomic Policies for the accession of European union countries in markets of Turkey. (Zürcher, 2004) In year 2000, the CBRT announced “DISINFLATION PROGRAM FOR THE YEAR 2000”. Structure of CBRT Organization and Governing Bodies: 1. GENERAL ASSEMBLY 2. BOARD 3. MONETARY POLICY COMMITTEE 4. AUDITING COMMITTEE 5. OFFICE OF THE GOVERNOR 6. EXECUTIVE COMMITTEE 7. HEAD OFFICE 8. BANKNOTE PRINTING PLANT 9. BRANCHES 10. REPRESENTATIVE OFFICES ABROAD Fig 1.1: The structure of CBRT 1. GENERAL ASSEMBLY It is composed of the shareholders who are registered in the share book of the Bank. Every person, who holds ten shares, is given the right of one vote. Person without required number of shares cannot represent more than one vote in the General Assembly. The chairman of the General Assembly is the Governor. Following duties and powers are held by the General Assembly: a. Examination of the annual report that is submitted by the Board and the report of the Auditing Committee b. Examination and approval of the income statements of the Bank c. Release of the balance sheet to the members of the Board and the Auditing Committee d. Increasing the capital e. Amending the articles of Association of the Bank Rendering a decision concerning the liquidation of the Bank (OECD, 2006). 2. BOARD The Board comprises the Governor and six members that are to be elected by the General Assembly. The Board requires the contribution of at least two third members and delivers a verdict by the preponderance of the members present. If there is a tie, party supported by the Governor had to be adopted. Vice Governors can attend meetings of the Board but cannot vote. Powers and duties of the Board are: i) Making decisions concerning the monetary policy in order to be implemented and utilization of monetary policy instruments in agreement with inflation target and the monetary policy strategy ii) Setting forth regulations and to make judgments on the replacement of banknotes in circulation and their abandonment from circulation and their demolition iii) Establishing procedures and conditions and to act out the necessary regulations regarding open market operations, foreign exchange operations, rediscount and advance operations in addition to rediscount and advance interest rates, the management of gold and foreign exchange reserves of the country iv) Determining the procedures and conditions for requesting information, evaluating risks and collecting statistics. v) Ratifying regulations and to render decisions regarding the establishment of branches, representative offices, liaison offices and the appointment of correspondents; and the Banknote Printing House vi) Preparation of the budget, annual report, balance sheet, income statements and the agenda of the General Assembly of the Bank vii) Submission of proposals to the General Assembly for changing the articles of Association of the Bank and increasing the capital viii) Supporting the regulations on the administration, organization, services and the Board looks after personnel of the Bank and other main administrative decisions regarding the bank. (Özbudun, 1980) 3. MONETARY POLICY COMMITTEE Under the Governor, the Monetary Policy Committee works and it consists of Vice Governors, a member to be chosen among the Board members and an associate to be selected by a combined verdict on the commendation of the Governor. The appointed member must have the same financial and social rights as the Board members. The Monetary Policy Committee has the following duties and powers: i) Determination of the principles and strategy of monetary policy in order to attain and maintain price constancy ii) Determine of the inflation target along with the Government within the structure of the monetary policy strategy iii) Taking necessary measures in order to protect the domestic and international price of Turkish Lira and establishing the exchange rate policy in determination of the similarity of Turkish Lira against gold and foreign currencies together with the Government. iv) Execution of the Monetary Policy Committee decisions is done by the Governor and is provided to the Board. (Richard, William, 2000)   4. AUDITING COMMITTEE Members of the Auditing Committee serve for a term of two years are being elected by vote. Higher education, knowledge and experience in the field of banking and accounting are necessary to have by Members of the Auditing Committee. (Richard, William, 2000) 5. OFFICE OF THE GOVERNOR The Governor is appointed for period of five years by a verdict of the Council of Ministers. Four Vice Governors are appointed for assistance of the Governor. Main duties are: i) Ensuring the enforcement of the provisions of this Law and the decisions made by the Board. ii) Responding appropriately to carry out the duties with which this Law entrusts the Bank and to make proposals to the Board on such measures whenever the Governor need. (Hoekman, Togan, 2005) 6. EXECUTIVE COMMITTEE The Executive Committee comprises of the Vice Governors under the chairmanship of the Governor. In cases where the Governor is not available, the Vice Governor assigned by chairman should supervise the Executive Committee. The duties of the Executive Committee are as follows: 1. Preparation of proposals to be submitted to the Board, by examination in advance for the issues subject to Board decision, when it is confirmed to be appropriate by the Governor 2. Drawing up regulations over the administration, organization and services of the Bank 3. Rendering decisions on issues that make subject to the decision of the Executive Committee according to the rules and regulations 4. Ensuring coordination in the operations of the Bank 5. Performing responsibilities related to the appointment, salary, dismissal and retirement of personnel other than those appointed by the Board. Majority of all the members take up the decisions of the Executive Committee. If there is a tie, that proposal is adopted that is being supported by the Governor (OECD, 2006).   HEAD OFFICE 18 departments make the Head Office of the Bank including the Office of the Secretary for Security and Defense, and the Inspection Unit. Other departments of CBRK include: 1. ACCOUNTING DEPARTMENT that functions in Turkish Lira Accounting Division, Foreign Exchange Accounting Division, Balance Sheet and Accounts Monitoring Division, Budget and Planning Division, Electronic Payments Division 2.BANKING AND FINANCIAL INSTITUTIONS DEPARTMENT that functions in Regulation and Monitoring Division, Financial Sector Assessment Division, Risk Centralization Division, Payment Instruments and Clearing Operations Division, Investment and Financial Instruments Division, Foreign Exchange Legislation Division, Foreign Trade Division. 3.COMMUNICATION DEPARTMENT that functions in Public Relations Division, Board and Auditing Committee Services Division, Translation Services Division, Correspondence Division, Administrative Assistance Division. (OECD, 2008) 4. Other departments are being mentioned in Fig 1.1. BRANCHES OF CBRT: There are 21 departments of CBRP in the whole country that are: 1. Adana Branch 2. Ankara Branch 3. Antalya Branch 4. Bursa Branch 5. Denizli Branch 6. Diyarbakır Branch 7. Edirne Branch 8. Erzurum Branch 9. Eskişehir Branch 10. Gaziantep Branch 11. İskenderun Branch 12. Istanbul Branch 13. İzmir Branch 14. İzmit Branch 15. Kayseri Branch 16. Konya Branch 17. Malatya Branch 18. Mersin Branch 19. Samsun Branch 20. Trabzon Branch 21. Van Branch REPRESENTATIVE OFFICES ABROAD There are four representative offices of Central Bank of Turkey and one liaison office abroad: 1. Frankfurt Representative Office 2. London Representative Office 3. New York Representative Office 4. Tokyo Representative Office 5. Berlin Liaison Office Functions of Central Bank of Turkey to Cope in the World in 21st Century: In last twenty years, the developments in worldwide environement have greatly influenced the functions of central banks. Advancement in telecommunications and financial markets has led the world towards globalization. Now, the result is that market forces to the ends of the earth spread the repercussions of economic events and decisions. These developments have influenced the basic working of the Central bank of Turkey as well. The Central bank of Turkey has two major responsibilities: 1. Ensuring monetary stability 2. Preserving financial stability. The country’s increased reliance on mechanisms of the market has increased the importance of independence for the Central bank. It has become obvious that price stability can best be secured by means of crystal clear, untie, and autonomous central bank (OECD, 2006).   Another design, which has gained fame, is that sovereign agencies that are not connected with the central bank should conduct banking supervision more successfully.   Improvement in information technology has made some central bank purpose less costly and others more expensive. Now, the Central banks are getting smaller and online banking services are available to the worldwide customers (OECD, 2006). Following steps are being taken to improve the quality of work of the bank and to cope up with the international market: 1. RULING OUT INTERMEDIATION FUNCTION IN BANKNOTES MARKETS AND THE FOREIGN EXCHANGE  Central Bank’s press broadcasted on January 2, 2002 with reference no: 2002-1that the Central Bank started to rule out its intermediary role in the Foreign Exchange and Banknotes Markets during 2002. The Central Bank aims at a deeper foreign exchange market by abandoning its intermediation function, facilitating the creation of a price behaviour, which fully reflects the risk awareness. Another purpose was for evading the spread of diverse communications to the markets with view to monetary and foreign exchange policies. (OECD, 2008) B) TURKISH LIRA DEPOSIT BUYING MART PROGRAM FROM SEPTEMBER  The Central Bank continued to make Turkish Lira entering purchase marts with a customary ripeness of four weeks that were started in April 2002 as an advancement to its present tools with the purpose of improving the effectiveness of its deeds to purify the surplus Turkish Lira liquidity in the system. The highest amount to be auctioned at each mart was limited up to 200 trillion Turkish Liras hold Turkish Lira deposit buying auctions. Role in Monetary policy: Monetary policy has significant tasks to give a constant increase and high financial growth for financial system. CBRT is accountable for performing and moving out the monetary policy and monetary indoctrination in Turkey. The principle of monetary policy that central bank carries out is to stop effects of financial instabilities for a constant financial system. The objectives of CBRT monetary policy are the ways of attaining final macroeconomics objectives of the society, like price stability i.e. low price rises rate, a constant growth i.e. high development rate, services and balance of expenses.  In 2006, Turkey’s central bank officially launched inflation targeting and used it as major tools adjustments to the base interference rate and interferences on the open market. The exchange rate command is a free-float, in which the central bank targets to prevent sudden oscillations. As much as the base interest rate is concerned, the central bank’s policy has been conventional. Since 2001, Cuts have been implemented but the central bank stayed conventional and watchful for a sudden domestic demand expansion, ever since it may be a source for inflationary pressure on the market. In 2006, after price rises began to climb, the central bank announced spiky interest rate hikes, following the global financial commotion, which hit financial markets. Till that time, the interest rates were safe and sound at 17.5%, but since September, the central bank started to cut down the rates gradually and has reached a collective 175bps cut over the last four months of the year. (OECD, 2008) The central bank is completely independent in prepared and strategy matters. On the other hand the cabinet appoints the central bank governor for a period of five years. Monetary policy decisions are taken on the second half of each month by a 7-member monetary policy council, which is presided over by the governor and includes the four deputy governors, a representative of the central bank board who is appointed by parliament and a representative selected by mutual agreement of the governor and the board, however the exact dates are announced at the beginning of the year. As it did twice in June 2006, the board may have emergency meetings, in case of imperative matters. (OECD, 2006) Central bank of Turkey in 2008: CBRT has raised inflation targets for the next year. Moreover, steps are being initiated in order to increase the loan tendency of the bank. Although there are uncertainties about the economic improvement and growth in Turkey. But CBRT is trying to take steps in order to avoid the crisis and loans from the IMF. Turkey's Central Bank has started to provide foreign exchange liquidity in the markets through foreign exchange auctions from October 2008. The bank may intervene in the markets by direct foreign exchange sales if there is an excessive instability. As there were apprehensions over the reliability of the worldwide economics sector due to the current problems in the global money markets, CBRT took a couple of decisions in an effort to regulate the functioning of the markets and CBRT would start foreign exchange auctions within this framework. The daily sum of foreign money to be traded in the marts would be fifty million US Dollars, adding that such total could be enlarged if well thought-out essential. In order to meet the challenges of economy in 2008, Turkey’s Central Bank has lowered benchmark interest rates to 15.5%. So, Turkey has average growth rate of 6% for the past six years. In 2007, it is clever to magnetize a confirmation twenty-one billion dollars in foreign direct investment (FDI) and its export amount has significantly improved now. Moreover, state agencies are acting as watchdogs and closely monitoring the Stock exchange of Turkey and the progress of the Bank that has made the performance of the Bank sustainable in 2008. (OECD) Bibliography: 1. Jan Zürcher, Erik. Turkey: A Modern History. I.B.Tauris, 2004 2. Özbudun, Ergun, and Aydin Ulusan. The Political Economy of Income Distribution in Turkey. Holmes & Meier Publishers, 1980. 3. Carl Barth, Richard, Hemphill, William, and Irina Aganina, Financial Programming and Policy: The Case of Turkey. International Monetary Fund, 2000. 4. OECD. OECD Economic Surveys: Turkey - Volume 2006 Issue 15.OECD Publishing, 2006 5. M. Hoekman, Bernard, and Sübidey Togan. Turkey: Economic Reform and Accession to the European Union. World Bank Publications, 2005. Read More