Dynamics of Foreign Currency Lending in Turkey
On June 16 2009, in what authorities called ``a surprise development'' the Turkish Government removed a provision from its existing laws that had allowed Turkish residents to borrow in foreign currency from banks operating in Turkey. The development ended a long era of foreign currency lending in Turkey at least in the sense of consumer loans. This paper studies the determinants and consequences of foreign currency lending for banks in Turkey in the run-up to this significant policy change. Our analysis uses detailed foreign and Turkish currency composition bank data for 21 commercial banks in Turkey between 2002 and 2010. We evaluate drivers of saving and lending in foreign currency(FX) in Turkey along with consequences for the banking system in particular and for the economy in general. We highlight possible risks to the Turkish banking system as a result of system's heavy exposure to both channels. In doing so, we show that the policy change was not necessarily a surprise but a cautionary step in the right direction to help keep Turkish banking system stable.
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- Ali M. Kutan & Erick W. Rengifo & Emre Ozsoz, 2010. "Evaluating the Effects of Deposit Dollarization in Bank Profitability," Fordham Economics Discussion Paper Series dp2010-07, Fordham University, Department of Economics.
- Cocco, João F. & Gomes, Francisco J. & Martins, Nuno C., 2009. "Lending relationships in the interbank market," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 24-48, January.
- Honig, Adam, 2009. "Dollarization, exchange rate regimes and government quality," Journal of International Money and Finance, Elsevier, vol. 28(2), pages 198-214, March.
- Akyurek, Cem & Kutan, Ali M. & Yilmazkuday, Hakan, 2011. "Can inflation targeting regimes be effective in developing countries? The Turkish experience," Journal of Asian Economics, Elsevier, vol. 22(5), pages 343-355, October.
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