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Sovereign Risk and Lending Behavior of Banking Industry: Evidence from Turkey’s Credit Market

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  • Osman Altay

    (Istanbul Commerce University)

Abstract

This study examines how sovereign risk influences Turkish commercial banks' lending behavior, focusing on asymmetric effects in commercial loan pricing. Using the Momentum Threshold Autoregressive (MTAR) model, we analyze the relationship between CDS premiums (a sovereign risk proxy) and lending variables. Results reveal strong cointegration between CDS spreads and Turkish Lira commercial loan rates, with asymmetric adjustments - banks rapidly raise rates when sovereign risk increases but show reluctance to reduce them during risk declines. While sovereign risk doesn't significantly affect loan volumes or default rates, it substantially impacts borrowing costs, demonstrating credit market rigidity. These findings highlight the procyclical nature of Turkey's credit market and validate the MTAR model's effectiveness in capturing nonlinear risk dynamics. The study contributes novel evidence that risk transmission mechanisms in emerging markets operate differently than in advanced economies, particularly in how sovereign risk primarily affects loan pricing rather than credit supply.

Suggested Citation

  • Osman Altay, 2025. "Sovereign Risk and Lending Behavior of Banking Industry: Evidence from Turkey’s Credit Market," Journal of Finance Letters (Maliye ve Finans Yazıları), Maliye ve Finans Yazıları Yayıncılık Ltd. Şti., vol. 40(124), pages 1-20, October.
    • Handle: RePEc:acc:malfin:v:40:y:2025:i:124:p:1-20
    DOI: https://doi.org/10.33203/mfy.1653601
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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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