Imposing Reserve Tax to Turkish Financial Institutions for Strengthening Reserves of The Central Bank of the Republic of Turkey

Although foreign exchange rates (FER) and inflation increased slowly between from 2002 and 2013, they increased rapidly after that time and they have reached the highest level in 2018 on annual base since 2006. Adverse developments in indicators like FER make negative effects on economic actors by causing uncertainty and uneasiness. They also cause adverse effects on a variety of macroeconomic indicators such as foreign debt burden and interest payments. For this reason, it is important for countries to determine causes of increasing in FER and take measures to keep them under control. For this purpose, there are a lot of conventional tools like tight monetary policy, tight fiscal policy, implementation of harmonious policies and capital controls. In this context, reserves of CBRT are an important tool. However, it is necessary to have adequate reserves in order to use reserves to keep FER under control. Taking into consideration this fact, it is recommended to impose reserve tax liability to financial institutions so that reserves of CBRT could be increased.


Introduction
Nowadays, international markets have become much more globalized than they have ever been. With the increasing globalization, countries have become more dependent each other. This structure causes financial fragility in many respects such as imbalance in foreign direct investments, high volatility in FER, deficits in current account and foreign trade depreciation of value of national currency, and hence resulting in high inflation and high interest rates. On the other hand, countries have been trying to decrease financial fragility and increase financial stability by taking a variety of precautions.
Due to fact that countries and markets are more fragile anymore, international capital flows are faster than they have ever been. This requires countries to take precautions rapidly. For enabling this, countries should have necessary tools, capacities and resources in both ministry of finance and central bank (CB) side. Taking into consideration that fiscal policy can make effect in longterm and monetary policy can make effect in short-term, tools, resources and capacities, which can be used by central banks, come to the fore.
When examining situation in Turkey, it can be seen that Turkey experienced problems in macroeconomic indicators such as budget deficit, foreign trade deficit, current account deficit, high inflation, high interest rates, instability in FER resulting in crisis of 2000 and 2001 (Kartal, 2018a: 209). Although financial stability is provided after 2001 crisis, problems in such macroeconomic indicators as FER, inflation, and interest rates have been seen in recent times. In this context of globalization, in order for definite victory in the mentioned indicators and keeping them under control, usage of appropriate and necessary tools, resources and capacities of central banks has substantial importance and effect. Central banks have a variety of tools; however, the most important of them is reserves.
Main purpose of usage reserves of central banks is to make international payment and take precautions against depreciation of national money against FER (Yüksel and Sarı, 2017: 42). Besides, reserves of central banks are used especially in volatile conditions to intervene markets to enable stability. These can be defined as main reason of accumulation of reserves of central banks. So, increasing reserves of CBs is essential. This is a question whether reserves of CBRT is enough or not. According to figures published by CBRT, there is a decreasing trend in both gross and net reserves. So, reserves of CBRT are not enough and additional reserves should be accumulated (Eren, 2017). However, there is no exact result regarding how much central bank should have reserves. The amount of reserves accumulated by central banks depends on countries' conditions. When examining CBRT's reserves, it can be seen that gross reserves was USD 28.23 billion as of 2002 end and USD 73.3 billion as of 2019 April. However, these figures show gross volumes which mean that net reserves have lower than this amount. Net reserves of CBRT were USD 11.06 billion and USD 26.9 billion, respectively (CBRT, 2019a). The difference between gross and net reserves shows an important point to be mentioned. The important partial of this difference results from required reserves (RR) of financial institutions in CBRT. The amount of RR of financial institutions in CBRT is USD 47 billion as of 2019 April and it counts for approximately 64% of gross reserves. However, it should be stated that total reserves resulting from RR are temporary reserves for CBRT because of the fact that CBRT does not have actually free usage right on these reserves (Eğilmez, 2017). Therefore, in the view of increasing capacities and resources of CBRT in implementation of effective monetary policy, increasing net reserves of CBRT is crucial.
Taken into consideration issues mentioned above, importance of reserves is obvious. Therefore, a proposal is proposed in order to increase net reserves of CBRT in this study. The proposal is to impose reserve tax to financial institutions. As far as it is known, there is no published article examining the proposal recommended in the study. For this reason, it is thought that the study has pioneer and unique characteristics taking into consideration the proposal recommended.
This study consists of five parts. After the introduction, Section 2 gives details about the contextual background. Section 3 reviews the literature related reserves of central banks. Section 4 analyzes effects of the reserve tax with all aspects. Section 5 summarizes the results of the study.

Contextual Background
CBs aim to provide contribution to the financial stability. CB could realize this by autonomy in the light of having necessary tools and instruments (Acemoğlu and Robionson, 2018: 424). Although there are a limited number of instruments, main tool, which can be used by CBs, is reserves.
CBs should take precautions rapidly to react undesired developments such as immediate increasing of FER in turbulence periods. In such conditions, CBs should consume excessive reserves to stabilize related financial indicators. Some selected main macroeconomic indicators for Turkey are included in Table 1. As it can be seen from Table 1, FER (USD), inflation (PPI), and commercial credit interest rate have an increasing trend from 2014 to 2018. Depending on distortions on these indicators, CBRT was able to have to increase policy rate from 8.3% as of 2014 end to 24% as of 2018 end. Also, in this process, CBRT used excessive reserves in order to keep FER under control by consuming net USD 12.8 billion reserves. Therefore, net reserves of CBRT decreased to USD 30 billion as of 2018 end from USD 42.8 billion as of 2014 end (CBRT, 2019a).
Besides distortions on some macroeconomic indicators, CBRT must have more reserves due to Turkey has an important amount of current account deficit, foreign trade deficit and foreign exchange currency debt owned by nonfinancial companies. All these factors require that CBs, specifically CBRT in Turkey example, should have enough reserves and if they do not have, they should accumulate and increase reserves of CB.

Literature Review
There are a variety of studies regarding reserves of CBs. Some selected studies are included in Table 2.

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When examining studies in the literature as a whole, as it can be seen from Table 2, there are various studies examining the relationship between independent variables and reserves of CBs. Also, such methods as regression, VEC, Granger Causality, ARDL, Engle Granger Co-integration, ADF, GMM, Johansen Cointegration, MARS et cetera are used in these studies to examine the relationship. However, studies regarding reserves of CBs in Turkey are very limited. Also, current studies in Turkish literature are limited to variables, which have effect on reserves. So, it is important to develop new proposals in order to increase reserves of CBs. It is obvious that there is a need such studies. In this study, it is aimed to develop and present a proposal to increase reserves of CBRT. In the next part of the study, details of the proposal are examined.

An Analysis regarding Imposing Reserve Tax to Financial Institutions
The proposal recommended is to impose reserve tax to financial institutions. This part of the study examines the details of the proposal. Firstly, trend of reserves of CBRT is examined. Secondly, concept and trend of RR is examined. Thirdly, concept of reserves tax is examined. Fourthly, some practices similar to reserve tax in Turkey are examined. Fifthly, tradeoff between reserve tax and RR is examined. Sixthly, possible outcomes of the proposal on reserves are examined if it was applied between 2011 and 2018. Lastly, necessary steps, which should be taken to apply the proposal, are examined.

Trend of Reserves of CBRT
There is a variable trend in reserves of CBRT. It is an important point that reserves can be measured in either gross or net. So, reserves are examined as both gross and net. Development trend of reserves in Turkey since 2006 is included in    Gross reserves/GDP was 11% as of 2006 end and it was 11.8% as of 2013 end, which is the highest level. After this level, it was decreasing and it has been 9.2% as of 2018-year end.
Net reserves/GDP has a similar trend with gross reserves/GDP. It was 8.1 % as of 2006 end and it was 8.8% as of 2009 end, which is the highest level. After this level, it was decreasing and it has been 3.8% as of 2018-year end.

Concept and Trend of Required Reserves
RR is a practice like an implied tax imposed to the financial institutions by CBRT. The framework regarding scope, mainly Central Bank Law (CBL) regulates timing and rates of RR. According to CBL, banks and other institutions, which are determined by CBRT, are subject to RR practice (CBL, 1970, article 40). Besides CBL, CBRT also issues a regulation named as Charter about Required Reserves in order to determine details of RR practice. According to the charter, followings of banks and financing companies are subject to RR (CBRT, 2013, article 4):  Deposit / participation fund,  Funds provided from repo transactions,  Loans used (excluding those provided by Treasury guarantee),  Securities issued (net),  Debt instruments not included in capital calculation,  Liabilities to the external center (net),  Debts from credit card payments.
As a summary, it can be said that deposits, which are subject to RR, include "deposits of real and legal persons, interbank deposits (excluding domestic interbank deposits), and deposits collected from Turkey by deposit banks on behalf of overseas branches". Figure 3 shows the development trend of required reserves in Turkey since 2011/9. RR was USD 23 billion as of 2006 September and they were USD 73 billion as of 2014 August end which is the highest level. After this level, they were decreasing and they have has been USD 47 billion as of 2019 April.
As general, it can be said that RR have a variable trend over time. So, they cannot be used by CRBT as actual or free reserves.

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Electronic copy available at: https://ssrn.com/abstract=3564227 RR has been changing over time depending on banks and financing companies. Due to fact that RR is not actual reserves belonging to the free usage of CBRT and they actually belong to banks and financing companies, RR have a high volatility in time. As it can be seen from figure above, change in RR compared to previous month is approximately USD 5 billion and has a narrow wave range until 2018 July; wave rage has been increasing after this time and reaches USD 11.6 billion as of 2018 August. This trend shows that RR is not a component of reserves because of the fact that RR is temporary reserves. For this reason, reserves of CBRT should be strengthened as actual.

Concept of Reserve Tax
Reserve tax is a participation share to be taken from financial institutions by CBRT similar to other self-regulatory bodies in Turkey, which are Energy Market Regulatory Authority (EMRA), Radio and Television Supreme Council (RTSC), Information Technology and Communication Authority (ITCA), Capital Markets Board (CMB), and Banking Regulation and Supervision Agency (BRSA). Financial institutions, which would be subject to reserve tax, will be determined by CBRT. Reserve tax to be taken as a participation share is going to be transferred to the reserves in order to increase and strengthen reserves of CBRT.
In theory, reserve tax would be imposed to everyone and every institution in the country. However, due to fact that it is related with the economic growth, usage of financial sources and financial aspect generally, imposing reserve tax to only financial institutions would be much more appropriate. For this reason, it is recommended that reserve tax would be imposed to financial institutions rather than everyone or every institution in the country.

Some Practices Similar to Reserve Tax in Turkey
As mentioned above, some regulatory bodies in Turkey have been taking participation share from institutions over which they have authority of regulation, Electronic copy available at: https://ssrn.com/abstract=3564227
EMRA takes 0.1% share of net oil sales. RTSC takes 1.5% share over monthly commercial communication revenues. ITCA also takes 0.35% share. As a financial authority, CMB takes a share with the increasing of the average of Consumer Price Index and Producer Price Index based on 2014. As another financial authority, BRSA takes 0.015% share over total balance sheet of banks prior year-end. Table 3 shows the development trend of the BRSA share between 2014 and 2018.

Tradeoff Between Reserve Tax and Required Reserve
Current RR practice could increase reserves of CBRT temporally due to fact that CBRT does not have actually free usage right on these reserves (Eğilmez, 2017). So, reserve tax is recommended in order to increase reserves of CBRT permanently. However, if reserve tax was applied without making any changes in current RR practice, there would be doubled liabilities on financial institutions. For this reason, if reserve tax came into force, making an adjustment in RR practice is a must. Hence, while structure of reserves of CBRT is changed and reserves of CBRT are strengthened, no additional liabilities would be imposed on financial institutions.

Outcomes of the Proposal If Applied for the Period between 2011 and 2018
The proposal recommended is to impose reserve tax to financial institutions. In this sub-part, effects of imposing reserve tax are analyzed. Financial institutions include a variety of financial companies such as banks, insurance, leasing and factoring companies, asset management companies, exchanges, intermediary institutions, publicly traded companies etc. In the study, in order to simplify the analysis, it is preferred to be taken only banking sector into consideration. Also, total assets size is preferred to calculate effect of reserve tax in the study although it is possible to impose reserve tax based on different indicators such as total shareholders' equity, market share etc.
Electronic copy available at: https://ssrn.com/abstract=3564227 As Table 4 illustrates, total assets size of Turkish Banking Sector has reached to TL 3,867 billion as of 2018 year-end while it was TL 1,218 billion as of 2011 yearend. Also, it is an important point that there should be a transition period. For this reason, calculation was started with 5% reserve tax rate in 2011 and it reached to 7% as of 2018. Based on the total assets size of Turkish Banking Sector, CBRT would have TL 75.4 billion for 2012, TL 119.6 billion for 2014, TL 177.5 billion for 2016, and TL 270.7 billion for 2018. Required reserves for the same years were TL 100.7 billion, TL 155.6 billion, TL 229.8 billion, and TL 265.2 billion, respectively. Because of the fact that there would be a transition period, the amount of RR, which is equal to the CBRT share in the relevant year, should be released. So, new RR for the same years would be TL 25.3 billion, TL 36.6 billion, and TL 52.3 billion. New RR would be TL 0 for the 2018. That is why transition process would be completed as 2018 yearend. The amount of reserves in terms of USD is calculated in Table 5 depending on the calculations taken place in Table 4. As Table 5 illustrates, if reserve tax was applied between 2001 and 2018 based on total assets size of banks, then there would be USD 407.8 billion as accumulated reserves. This in a substantially important in

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111 terms of reserves especially when taking into account that there is USD 26.9 billion net reserves as of 2019 April.
According to the authors, it is much more reliable to take into consideration year-end USD/TL FER due to fact that total assets size of banks would be end of the years. So, banks would pay reserve tax at the end of each year. A need to renewal of current regulation is ignored here and it is handled in forthcoming subpart of the study.
As mentioned above, there are lots of financial institutions. So, regulatory authorities would determine scope of reserve tax, and much more type of financial institutions would be included in the reserve tax. Types of these financial institutions summarized as follows:  Institutions subject to BRSA (BRSA, 2019b): Banks (53) Depending on the selection how much and which type of financial institutions would be included in reserve tax practice; there would be a higher amount to be accumulated reserves.

Necessary Steps to Apply the Proposal
In this study, a proposal is recommended to strengthen reserves of CBRT. It is to impose reserve tax to financial institutions. RR practice is also associated with the reserve tax concept. However, it is clear that there are legislations to regulate RR practice and how a new tax is imposed.
As mentioned above, CBL regulates RR practice in article 40. Similar articles take place in the Charter about Required Reserves in article 4 (CBRT, 2013, article 4). So, in order to apply the proposal, it is a must to remove/revise these regulations in CBL and Charter. After that, a regulation saying that a reserve tax to financial institutions is imposed with a transition period. The most possible date to pay reserve tax by financial institutions is year-end. That is why FER of year-end is used in analysis in the study.
It is an important point to be stated that total assets of Turkish Banking Sector is very high and CBRT would collect and accumulate so much reserves if a reserve tax was imposed. In order to decrease negative effects of the proposal on financial institutions, there should be a transition period and the rate of reserve tax could be started with 5% and could be reached to 7%. After approximately 8 years transition period, the proposal could be fully applied. Effect of imposing reserve tax to financial institutions would be tolerated by decreasing RR liabilities. When the transition period is completed, it is recommended to fully remove of RR liabilities to financial institutions. Hence, CBRT could accumulate real reserve rather than temporary reserves.

Conclusion
It is known that the level of reserves of CBRT is quite low. Therefore, there is a discussion about how much reserves CBRT has. Depending on data of CBRT, it is clear that reserves have been decreasing. Because of the decreasing trend, it is important to develop new proposals to increase reserves. In order to this, a proposal is developed and recommended in this study. The proposal mainly consists of imposing a reserve tax to financial institutions.
According to the analysis made by using data for the period of 2011-2018, total assets size of Turkish Banking Sector has reached to 3,867 billion as of 2018 yearend. If the reserve tax was started 5% in 2011 and it was increased 0.5% each year, total USD 407.4 billion reserves would be accumulated. When taking into account that CBRT's gross reserves is USD 73.3 billion and net reserves is USD 26.9 billion as of 2019 April end, it is clear that the proposal would be very effective to increase reserves of CBRT if applied. Of course, much more reserves would be accumulated if reserve tax was applied to a broader mass of financial institutions. It would be also possible to apply reserve tax based on different alternatives such as market shares or net profit of the financial institutions or a combination of these parameters. Reserve tax would be differentiated according to type of financial institutions or systematic importance. For the simplicity in the analysis, banking sector and total assets size are preferred in this study. Additional proposal should be searched in order increase reserves of CBRT. It is an important point to be stated that there is a requirement to make changes in current legislations.
Implementation of the proposal would provide an important contribution for increasing reserves of CBRT. The capacity of CBRT to intervene to FER when financial instability is seen would be increased by strengthening reserves. Hence, contribution to financial stability from many perspectives, especially stabilization of FER and decreasing inflation by this way would be provided. This cycle would be followed with increasing efficiency of monetary policy, decreasing interest rates, decreasing public debt and interest payments. For this reason, it is highly recommended to apply the proposal stated in this study by related authorities if strengthening of reserves of CBRT is really desired.