BDL cancels financial
engineering lira accounts

Equivalent to an estimated $1.5 billion in current value

The Central Bank (BDL) is writing off the lira loans provided to banks under the financial engineering operations carried out since 2017. The liquidation is made against the proceeds of these loans that were deposited with BDL.

In a recently published BDL balance sheet, it was noted that the decision has been taken by BDL’s Central Council at the end of May. The Central Bank is gradually implementing this operation, on a bank-by-bank basis, after calculating the exact balances, taking into account differences between debit and credit accounts. Post- completion of this write-off, BDL will no longer be paying interest on these lira deposits.

The lira loans were granted at an interest rate of two percent to banks that deposit with BDL fresh dollars attracted from abroad. The loans were equivalent to 125 percent of the dollar deposits. The proceeds of the lira loans were deposited with the Central Bank, with terms generally ranging from five to 12 years, at attractive interest rates typically varying between 8.5 percent to 11-12 percent. The longer the term of the deposit, the higher was the interest rate.

The financial engineering scheme stipulated that the banks could not distribute the profits they had generated from these operations. These earnings, which have not been converted into dollars, were estimated by the forensic audit report of Alvarez & Marsal at LL7.3 trillion ($82 million at the current exchange rate).

“The profits generated from the financial engineering operations were substantial but they have now lost their value. The banks’ dollar deposits with BDL have basically become lollars. Eventually, banks and most depositors didn’t benefit from the financial engineering. Borrowers were the major winners. Most of them settled their debts at the old official exchange rate,” said a top executive in a major bank who requested anonymity. The loans of commercials banks to their resident customers plunged from $47 billion at the end of October 2019 to $5.7 billion at the end of June 2024.

“The loans provided by BDL under the financial engineering operations that were halted with the start of the uprising in 2019 exceed by far the currency in circulation, and BDL is adamant to contain the lira money supply,” said the banking source. The lira currency in circulation stood at LL59.6 trillion ($666 million) at mid-August 2024. Total lira bank deposits with BDL are equivalent to nearly $1.5 billion at today’s exchange rate. The remaining $85.5 billion are in lollars.

The largest amounts of fresh dollars entering the banking sector thanks to financial engineering were recoded from mid-2018 until the onset of the protests in the last quarter of 2019 as banks were attracting funds from abroad by offering significantly higher interest rates.