Turkey tests new policy on checking accounts

A paper by the Central Bank of Turkey published this month shows that a proposed increase in the amount that drawee banks are legally responsible to pay by the Turkish government would have an undesirable effect on cheque transactions and tighten access to credit during recessions.

Unlike the US economy and other modern economies where cheques are used in all kinds of daily transactions, cheques are almost exclusively used by merchants in the Turkish economy as more than 30m cheques are processed by banks each year,

During economic downturns, particularly small-scale enterprises complain that they are having difficulties in getting full payment for their cheques when they demand a cash out. The Turkish government has considered supporting the real economy by increasing the amount that drawee banks are legally responsible to pay to increase the credibility of cheques.

This paper looks at the importance of regulatory practices and policy actions associated with the use of cheques for the real economy and, in particular, for small- and medium-scale enterprises who are substantially dependent on cheques to ease out their liquidity needs.

This paper formally discusses the potential effects of the proposed policy action by the Turkish government and finds that such a policy measure would cause the drawee banks to cut the supply of cheques which, in turn, would negatively impact the economy.

Unlike the policy target, which attempts to use the penalty charge increase to ease the risk of liquidity shortages that the small firms are exposed to, results show on the contrary that an increase in penalty costs would reduce access to short term credit to small-scale business that are dependent on cheques as a form of short term liquidity.

The magnitude of the effect of an increase in charge on the total supply of cheques depends on the elasticity of demand for cheques, how fast the fraction of bad cheques increases with the total quantity of cheques and how heterogeneous are the tastes.

The paper also claims the demand for cheques should be inelastic is, in fact, not true by establishing that the policy response on the margin is fairly elastic.

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