The Expected Relationship between Liquidity Position and Lending Activities Disrupts as Banks' Liquidity Positions Increase - CBRT Economic Notes
A study conducted by experts at the Central Bank of the Republic of Turkey (CBRT) observed a disruption in the expected relationship between liquidity position and credit activities during periods when banks' liquidity positions increased. The Economic Note titled "A View on the Relationship Between Liquidity and Credit Channel from a Period of Abundant Liquidity," authored by CBRT specialists Salih Zeki Atılgan and Hüseyin Öztürk, was published on their website.
In the study, the transmission of monetary policy through the credit channel was examined from the perspective of banks' liquidity positions within the Turkish banking system for the period from January 2010 to March 2024. The results indicate that the expected relationship between liquidity position and credit activities deteriorated during periods when banks' liquidity positions increased.
Findings from the analysis emphasize the importance of strengthening the monetary policy with liquidity measures during periods of abundant liquidity. The conclusion section of the analysis stated: "This study investigated the effect of liquidity position on the credit channel for the Turkish banking sector during the period from January 2010 to March 2024. The results of the analysis indicated that until 2020, there was a statistically significant positive relationship between liquidity position and credit activities, but this relationship deteriorated in the subsequent period corresponding to the increase in banks' liquidity positions. Repeating the analyses over three-year moving periods confirms the current findings.
The results show that banks' liquidity position plays a crucial role in ensuring the effective functioning of the credit channel of monetary transmission. Our study suggests that the tight monetary policy applied could be more effective if supported by liquidity measures. In other words, in order for monetary transmission to operate healthily in the banking sector, the liquidity position must be at a level that enables transmission. This way, it is possible for the tightening monetary policy to yield the expected response in terms of credit growth and achieve the desired stringency.
Monetary policy in the fight against inflation is carried out through a combination of interest policy that corresponds to the general needs of the economy and a set of macroprudential policies. The current study emphasizes the need for effective liquidity management to support the interest rate tool within a tight monetary policy. Tightening liquidity measures should be assessed in this regard."