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Financial Stability of the Turkish Banking Sector

  • Münür Yayla
  • Alper Hekimoglu
  • Mahmut Kutlukaya

In the narrow sense, financial stability is defined as price stability and the soundness of financial institutions. Although this definition can be extended to cover the functioning of financial markets, asset price volatility, risk management practices of institutions, etc., financial soundness of banks is still at the center of stability concerns. In this context, several methods have been developed to measure stability in terms of a common metric. In this paper, we analyze the stability of the Turkish banking sector in the period of 2000-2006 by applying an option theory based method that allows the estimation of default probability of the sector. We conclude that stability (default probability) was the weakest (highest) in 2001 and it entered in a healthy path after 2003. Furthermore, the sector resisted strongly to the May-June turmoil of 2006. Soundness of the sector remains relatively stable following the turmoil period

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Article provided by Banking Regulation and Supervision Agency in its journal Journal of Banking and Financial Markets.

Volume (Year): 2 (2008)
Issue (Month): 1 ()
Pages: 9-26

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Handle: RePEc:bdd:journl:v:2:y:2008:i:1:p:9-26
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  1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  2. Fatih Ozatay & Guven Sak, 2003. "Banking Sector Fragility and Turkey’s 2000–01 Financial Crisis," Working Papers 0308, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  3. Merxe Tudela & Garry Young, 2003. "A Merton-model approach to assessing the default risk of UK public companies," Bank of England working papers 194, Bank of England.
  4. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
  5. Jan Willem van den End & Mostafa Tabbae, 2005. "Measuring Financial Stability: Applying the MfRisk Model to the Netherlands," DNB Working Papers 030, Netherlands Central Bank, Research Department.
  6. Michael T. Gapen & Dale F. Gray & Cheng Hoon Lim & Yingbin Xiao, 2005. "Measuring and Analyzing Sovereign Risk with Contingent Claims," IMF Working Papers 05/155, International Monetary Fund.
  7. Arnaud Jobert & Janet Kong & Jorge A. Chan-Lau, 2004. "An Option-Based Approach to Bank Vulnerabilities in Emerging Markets," IMF Working Papers 04/33, International Monetary Fund.
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