Increasing foreign exchange (FX) volatility is the major problem of emerging markets' financial systems. And although banks in Turkey are perfectly capable of managing their own FX positions thanks to strict regulations and recent experiences, their exposure to the FX position of their debtors – non-financial firms – increases their credit risk.
This currency-induced risk is caused by the net short FX position of the real sector, whose assets are in local currency, compared with their FX-denominated liabilities. Recently, the Turkish banking sector’s position has been heavily criticised due to the extent of its exposure to this risk. Its existence is an inconvenient truth.
