Targeting offshore funding
Turkey is stepping up efforts to restrict local banks’ access to cheaper funding abroad as part of a broader campaign to deter hot-money flows into the offshore lira market, particularly in London. The banking regulator BDDK has urged lenders to refrain from using synthetic swap transactions that allow them to obtain lira liquidity overseas at lower rates.
Closing loopholes
The move followed discussions between central bank and finance ministry officials with investors in London and New York, where concerns were raised about banks circumventing offshore swap limits. These synthetic structures enabled lenders to access liras at around 30%, well below the central bank’s 37% policy rate, effectively diluting the impact of tight monetary policy.
Policy and volatility risks
Authorities fear that cheap offshore borrowing undermines monetary tightening and fuels the offshore-based lira carry trade, one of the most lucrative strategies in emerging markets. With volumes estimated in the billions of dollars, regulators see a heightened risk of sharp reversals and market volatility.
Encouraging longer-term investment
Instead of short-term speculative flows, policymakers are pushing investors toward longer-dated lira assets, including government bonds. Some domestic banks have already begun increasing their holdings, a shift officials hope will support financial stability.
Lessons from past shocks
The crackdown reflects lessons from March 2025, when political turmoil triggered a sudden capital exodus and a sharp fall in the lira, forcing emergency rate hikes and costly interventions. At the time, offshore lira trading was estimated at more than $30 billion.
Conclusion
As International Investment experts note, Turkey’s approach underscores a clear preference for safeguarding macro-financial stability over accommodating high-yield speculative trades. While the measures may dampen carry-trade appeal, they also heighten the importance of consistent and credible policy signals for long-term investors.