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Is the Leverage of Turkish Banks Procyclical?

Author

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  • Mahir Binici
  • Bulent Koksal

Abstract

This study examines the relation between leverage and asset growth in the Turkish banking sector, and finds that there is a statistically significant positive relationship between these two variables. This result indicates that the leverage ratio increases when there is positive asset growth, hence the leverage is procyclical. In addition, this relationship differs according to the business models of the banks. Procyclicality of the leverage indicates that expansion and contraction of bank balance sheets accelerate credit cycles implying that bank leverage and business cycles are related. Consistent with the predictions in the corporate finance literature, we find that balance sheet size and profits significantly affect the leverage. To decompose leverage, we also document that banks use non-deposits and deposits as substitutes during our sample period, and the leverage cycles and balance sheet expansions are highly correlated with non-deposit and non-core liabilities. In this sense, it is useful to include the leverage ratio in the counter-cyclical macroprudential policy tools kit.

Suggested Citation

  • Mahir Binici & Bulent Koksal, 2012. "Is the Leverage of Turkish Banks Procyclical?," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 12(2), pages 11-24.
    • Handle: RePEc:tcb:cebare:v:12:y:2012:i:2:p:11-24
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    File URL: https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Central+Bank+Review/2012/Volume+12-2/
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    References listed on IDEAS

    as
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    Cited by:

    1. Engin Yilmaz & Bora Suslu, 2016. "Turkish Non-Core Bank Liabilities," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 14(1), pages 75-92.

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    More about this item

    Keywords

    Leverage; Procyclicality; Banking;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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