The Central Bank had been increasing its gold reserve through gold reserve requirement facility since 2011 as part of its monetary policy. Turkish commercial banks are required to hold a portion of their Turkish lira and foreign currency liabilities at a blocked account in the Central Bank as ‘reserve requirement'. In 2011 it allowed banks to hold up to %10 of these Turkish lira reserve requirements in physical gold, in the form of good delivery bars at its account in Bank of England. Since then, the ratio increased to %30 as well as the coefficient of every gold facility ratio. As in September 2016, an additional %5 ratio is introduced to accept scrap gold as well.

The intention of the Central bank allowing banks to hold gold instead of Turkish lira is to increase the turkish lira liquidity in the banking system, so the banks can use this excess Turkish lira for lending purposes that they don’t need to keep anymore in the blocked accounts of Central banks. This is a way of easing for the Central bank. In perspective of the bank holding gold instead of the Turkish lira is more profitable because of the wide interest rate difference of gold and Turkish Lira. Central Bank data is showing that by 13th of january, banks hold %24 of the %30 maximum allowance as bars and %0.20 of the %5 as scrap gold instead of Turkish lira reserve.

Why does the Turkish Banks hold gold at Turkish Central Bank and how they do it?