Banks in Turkey use gold as a reserve

Turkey's central bank has been accepting gold holdings from commercial banks as full-fledged reserves since 2011. This choice appears to be working out well for the banking sector, as the depreciation of the Turkish lira proves that the precious metal is a solid instrument for banks to meet capital requirements.

While the value of the domestic currency has fallen by about twenty percent against the dollar in the first five months of the year, the price of gold in dollars has remained the same over the same period. This means that banks that hold physical gold as part of their capital reserves are benefiting from the rising gold price in Turkish lira.

Analyst Jeffrey Christian of the CPM Group also sees the benefits of using gold as a reserve for banks. "I think the Turkish method is brilliant, it allows you to use gold in a way for which it is intended", he told the Middle East Eye. If the value of the precious metal rises, it immediately strengthens the capital ratio of banks. This makes banks less vulnerable in times of crisis or when the value of the currency falls.

Gold as a reserve for banks

Since Turkey accepts gold as a full-fledged reserve for banks, these private gold reserves are also added to the central bank's public gold reserves. As a result, according to official statistics, Turkey currently has 580 tonnes of gold under management, compared to just over 100 tonnes before this change was implemented in 2011. Turkey itself has added gold to its public supply in recent years, but most of this increase is accounted for by gold owned by commercial banks or their customers.

By accepting gold as a fully-fledged reserve, the Turkish central bank is sending two important signals. Firstly, that the precious metal is regarded as a stable and valuable reserve and, secondly, that gold is regarded by the authorities as a form of public property within the financial system. For that reason, it remains recommended to keep your precious metal in-house or store it with a specialized storage company that is not part of the financial system.

Turkey's gold supply has increased sharply (Source: Trading Economics)