Determinants of the Banking Crises in the Turkish Economy

We constructed a monthly banking sector fragility index. According to this index, during the January 1987 – October 2004 period, the Turkish economy experienced three banking crises (in 1988, in 1994 and in 2001), two of which (in 1994 and in 2001) were twin crises. With risks at quite a high level, the banking sector was vulnerable to crises prior to all three events. A number of conclusions emerge from our probit estimations. Currency and banking crises are closely linked, and the twin crises have been the problem of the Turkish economy especially since 1990. The banking crises in Turkey in the aforementioned period were accompanied by sudden reversals in capital flows. A real depreciation of the Turkish Lira increases the likelihood of a banking crisis. An economic contraction reduces the value of the bank assets by making it difficult for the banks’ costumers to repay their credits, thus raising the likelihood of a banking crisis. The ratio of broad money to international reserves significantly affects the probability of a banking crisis, although this does not appear as a significant factor in the 2001 banking crisis.