Dynamics of Foreign Currency Lending in Turkey

Kutan, Ali and Ozsoz, Emre and Rengifo, Erick (2012): Dynamics of Foreign Currency Lending in Turkey.

Abstract

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Dollarization, bank performance, bank profitability, Turkish economy
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O24 - Trade Policy ; Factor Movement Policy ; Foreign Exchange Policy; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; F - International Economics > F3 - International Finance > F31 - Foreign Exchange; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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