Türkiye is lowering the cap on public banks' use of special government bonds, initially issued for capital boosts, to pre-2023 levels, marking the latest step in a policy pivot since after last year's elections.

Under the draft 2025 budget recently submitted to parliament, the limit for issuing special issue government domestic debt securities on loan is being reduced from 3% of budget appropriations to the former rate of 1%.

The higher rate had been used before the 2023 presidential and parliamentary elections to enable state banks to be capitalized and provide loans cheaper than market conditions.

The latest move will reduce the additional capital or special bond issuance that supports banks' equity. The main state lenders are Ziraat, Vakıfbank and Halkbank.

Since mid-2023, the Treasury and central bank have either removed previous economic policies or brought regulations back in line with their former structure in a policy U-turn toward greater orthodoxy.

The special issue bond issue is a type of security issued for the capital increase of public banks. The banks buy this security and lend money to the Treasury. The Treasury then lends this money to the Wealth Fund, and the Wealth Fund lends it to public banks.

The Türkiye Wealth Fund (TWF) provided a total of TL 111.7 billion ($3.26 billion) of capital support to public banks through special issue government domestic debt instruments issued by the Treasury in March 2023.

A banking source said that since they are issued in euros or dollars, the Treasury does not want these papers to appear on its own balance sheet.

"In order to avoid the perception that it borrowed foreign currency from the domestic market... it is reducing its share in the budget," the source said, meaning it will not provide additional capital to public banks or will reduce its capital-like loans.

"This limit for public banks to provide loans cheaper than market conditions was raised before the elections. Now it is being pulled back to old levels. We evaluate this within the scope of normalization," another banker said.