What is Late Liquidity Window, What Does It Mean?
Late liquidity window is an opportunity provided by the Central Bank of the Republic of Turkey (CBRT) to banks as the lender of last resort to prevent payment problems that may occur between banks at the end of the day. Thanks to this facility, banks can borrow or lend in TL from the CBRT in an overnight maturity. These operations are carried out between 16:00-17:00. The late liquidity window is a temporary and overnight application.
The purpose of the late liquidity window is to manage TL liquidity in the market to achieve monetary policy objectives. The CBRT can affect the funding cost and the value of TL by determining the interest rates it applies in the late liquidity window. For example, if the late liquidity window raises interest rates, banks' cost of borrowing from the CBRT increases and the value of TL rises. This may limit the increase in exchange rates. Likewise, if the late liquidity window reduces interest rates, banks' cost of borrowing from the CBRT decreases and the value of TL decreases. This may support the decline in exchange rates.
There may be two reasons for borrowing from the late liquidity window. First, it may arise from a situation that has nothing to do with the bank itself. For example, TL liquidity may be lacking at the end of the day due to the bank's transactions with its customers or other banks. In this case, the bank can solve the payment problem by borrowing TL from the CBRT overnight. Second, the bank's financial situation may be poor. For example, if the bank cannot find enough TL in the market or has to pay very high interest, it may prefer to borrow TL from the CBRT overnight.
There is usually no reason to lend during the late liquidity window. Because banks can make TL available in the market at higher interest rates instead of lending to the CBRT. However, in some cases, banks may lend TL to the CBRT on an overnight basis. For example, the bank may have excess TL liquidity and may not find sufficient demand in the market. In this case, the bank can earn interest income by lending TL to the CBRT overnight.
The late liquidity window is part of the CBRT's monetary policy operational framework. CBRT may change and simplify this framework from time to time. For example, in 2022, the CBRT simplified the late liquidity window and determined the one-week repo auction interest rate as the policy rate. Thus, banks' funding costs are equal to this interest. In addition, the CBRT determined the overnight borrowing and lending rates with a margin of +/- 150 basis points compared to the policy rate.
The late liquidity window is a mechanism that gains or loses importance depending on developments in the economy. For example, in periods when inflation increases or TL loses value, the CBRT may use the late liquidity window more frequently and increase interest rates. Thus, it can tighten the market and support the TL. However, in periods when inflation decreases or TL appreciates, the CBRT may use the late liquidity window less and reduce interest rates. Thus, it can loosen the market and stimulate economic activity.
The late liquidity window is an issue that banks and investors follow closely. Because the late liquidity window may affect TL liquidity, interest rates and exchange rates in the market. This can determine banks' profitability and investors' returns. Understanding how the late liquidity window works and how the CBRT uses it is important for making economic analysis and making correct investment decisions.