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Determinants of the Banking Crises in the Turkish Economy

Author

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  • Cemil VARLIK

    (Gazi Üniversitesi)

Abstract

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.

Suggested Citation

  • Cemil VARLIK, 2007. "Determinants of the Banking Crises in the Turkish Economy," Iktisat Isletme ve Finans, Bilgesel Yayincilik, vol. 22(260), pages 120-146.
  • Handle: RePEc:iif:iifjrn:v:22:y:2007:i:260:p:120-146
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    Keywords

    banking crises; twin crises; banking sector fragility; probit estimation;

    JEL classification:

    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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