The Effects of Financial Dollarization on Banking System

Within the framework of the economy programs started to be implemented in the 2000s in Turkey, despite the acceleration of the decline in inflation rates, such decline has also been observed in the interest rates and the rates have almost reached to zero, and the appreciation of Turkish Lira, no decline has been observed in the dollarization process. As an expected result of the case, the effectiveness of central bank’s monetary policy has been decreasing, liquidity problems emerge because of the due date differences between assets and liabilities in the banking sector, structural breaks has been seen in money demand. The present study discusses the relationship of the banking sector with the financial dollarization, which is one of the most important units of the economy and the symbol of financial stability. When considered in terms of banking sector, financial dollarization, which is defined in the dictionary as the assets and liabilities denominated in foreign currency in the country, has two basic elements: deposits and loans. These qualities also play an active role in the measurement of financial dollarization. The aim of the study is to assess the relationship between the financial dollarization process in Turkey and the financial stability through the banking sector. Eviews 8 is used in the econometric analyses. After the BRSA started to operate in 2006, Turkish banking system has radically changed in the last 10 years and become a great example in the world. In conclusion, a negative acceleration in financial dollarization has been observed to occur depending on the increase in the stability of the banking sector, which is a part of the financial system.