The encyclopedia · Finance & Accounting · Financial decision · 2011–2014
Turkey let banks hold FX and gold as lira reserves — an automatic stabilizer
CBRT's Reserve Option Mechanism let banks hold dollars, euros and gold against lira reserve requirements, absorbing capital-flow shocks without FX intervention.
Central Bank of the Republic of Turkey (CBRT)
The solution
After 2008, quantitative easing pushed floods of capital into emerging markets, strengthening the lira and widening Turkey's current-account deficit. Traditional tools — FX intervention and reserve requirements — were blunt and costly.
In September 2011 CBRT introduced the Reserve Option Mechanism: banks could keep up to 10% of their lira reserve requirements in US dollars or euros, later adding gold and raising the cap to 40% by November 2011 and 60% by August 2012.
The mechanism worked as a shock absorber: when flows reversed, banks had a natural pool of FX to draw on, so the central bank needed far less intervention. CBRT research found lira volatility remarkably low versus peers after adoption, and a 2013–14 GARCH study found the ROM dampened volatility during the Fed's tapering.
Why it worked
- Banks self-insure: the option is used most when it is most valuable.
- It removes the central bank's need to guess the right moment to intervene.
- Gold and FX broaden the pool without printing lira.
- The cap makes the tool bounded and predictable.
What can be applied
Build the buffer into the rule: a countercyclical reserve option smooths capital-flow shocks cheaper than discretionary intervention, because banks do the adjusting.
Aftermath
The ROM became a standard piece of Turkey's policy toolkit through 2014 and was studied by other emerging-market central banks, though later Turkish crises showed that no reserve mechanism can substitute for fundamentals.
Sources
- Alternative Tools to Manage Capital Flow Volatility (Working Paper 13/31)
- Impact of Reserve Option Mechanism on Exchange Rate Volatility During the FED's Tapering Period
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