Currency protected deposit accounts in Turkish banking law
Since the President’s speech on December 20, 2021, “FX-Protected Deposit Accounts” have been at the forefront of discussions on banking and financial applications. The instrument, whose legal foundations were laid with press release No. 2021/14 on support for the conversion of deposit and participation accounts into Turkish lira [“Communiqué”] published in the Official Journal immediately after the speech, on December 21, 2021, found an ever-widening scope with amendments adopted in the following days and finally took its final form. In this article, we will look at FX Protected Deposit Accounts along with their legal basis.
I. What is an Exchange Protected Deposit Account?
An FX-Protected Deposit Account is a banking instrument individuals may prefer for their FX deposits [deposits in foreign currency], in which the opportunity cost resulting from the appreciation of the foreign currency types is guaranteed in the event of an appreciation rate higher than the interest rate TL determined on the maturity date of the deposit. Savings currently held in US Dollars, Euros and British Pounds can be converted to Turkish Liras and in an exchange-protected TL Term Deposit Account.
II. Who is eligible to open a currency protected deposit account?
When exchange-protected deposit accounts were first discussed, it was announced that only real people could benefit from the instrument. Indeed, legal persons were initially excluded from the scope of the communiqué, as the scope was determined as “to regulate the procedures and principles concerning the support to be provided to holders of deposit and participation funds in the event that foreign currency deposit accounts and foreign currency denominated holdings the funds of real persons are converted into Turkish lira forward and holding accounts”.
At the current stage, this initial position has been abandoned and the communiqué has been amended on January 11, 2021, this time allowing legal entities to open exchange-protected deposit accounts. As a result, legal persons residing in Turkey, excluding banks and other financial institutions, could now benefit from this instrument in the current situation.
Natural persons can register accounts with maturities of 3 or 6 months, or 1 year, while legal persons can only register accounts with maturities of 6 months or 1 year. Other than that, there is no substantial difference in how individuals and corporate entities can use the instrument.
There are no further limitations on opening exchange-protected deposit accounts based on country of origin, citizenship, nationality or country of incorporation in the case of legal persons. Accordingly, any natural or legal person residing in the country is eligible to create an account. In addition, the rule allows non-resident Turkish citizens working abroad, either as employees or self-employed, to open an account.
III. Exchange Protection and Other Privileges Granted to Exchange Protected Accounts
The one-week repo interest rate of the Central Bank of the Republic of Turkey [“CBRT”], commonly referred to as the policy rate in the public, was determined as the lowest interest rate a bank can pay to exchange-protected deposit accounts as part of the release. Therefore, the minimum amount payable to the client at the end of the maturity period will be the sum of the principal and interest on the policy accrued during the maturity period. Banks can also set an interest rate above the CBRT policy rate to be applied to exchange-protected deposit accounts.
If the rate of appreciation of the foreign currency determined during the maturity period is lower than the interest rate applied to the account, no further payment is made to the client. However, if the exchange rate protection is activated, in other words, if the determined exchange rate appreciates at a rate higher than the interest rate, the difference between the appreciation and the amount of interest must also be paid to the customer. In this case, while the bank pays the interest applied to the account, the CBRT pays the difference between the appreciation rate and the interest applied to the account. For example, if a client deposits 10,000 TL in a currency-protected deposit account with 15% interest and a one-year maturity, and the determined foreign currency appreciates by 10% during the same period, the bank will pay the customer 11,500 TL, principal + interest, since the appreciation of the currency remains below the interest rate. However, in the same case, if the currency appreciates by 20%, since the rate of appreciation exceeds the interest rate, 12,000 TL consisting of principal + interest + currency appreciation is paid to the customer, and the 500 TL part consisting of the difference between the interest rate and the appreciation rate is paid by the CBRT. When calculating the exchange rate difference payments, the purchase rate of the US dollar, euro and British pound, announced by the CBRT at 11:00 a.m. daily, is taken as the basis. In the event of withdrawal of money from the account before maturity, no capital gain payment is made by the CBRT.
In order to encourage exchange-protected term deposit accounts, no deposit deductions are made on these accounts and no withholding taxes are levied. However, there are ongoing discussions about improving the privileges of exchange-protected accounts and introducing certain tax exemptions for account holders.
IV. (In)adequacy of current regulations
The December 21, 2021 communiqué, which is currently the only legal instrument regulating exchange-protected deposit accounts, does not summarize all of the statements made by the administration on the subject and certain aspects of the instrument which is already used in application. For example, while it has been widely reported that a maximum interest rate has been put into effect for banks in exchange-protected deposits, this enforcement has yet to be regulated as part of the release. The fact that this and other debates regarding exchange-protected deposit accounts are continuing demonstrates the need for comprehensive legislation on the matter, preferably enacted by the Grand National Assembly. Otherwise, the absence of such legislation will invariably lead to debates about legal predictability and raise doubts about the instrument.