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Foreign Currency Lending and Banking System Stability : New Evidence from Turkey

Author

Listed:
  • Emre Ozsoz
  • Erick W. Rengifo
  • Ali M. Kutan

Abstract

This paper studies the drivers of foreign currency lending by Turkish banks along with its consequences for the banking system in particular and for the economy in general for the period between 2003 and 2009. Our sample ends in 2009 because foreign currency lending to households in Turkey is banned starting in the second quarter of 2009. We highlight possible risks to the Turkish banking system as a result of the system's heavy exposure to exchange rate and default risks. Our findings show that deposit dollarization seems to be the most important driver of loan dollarization in the case of Turkey. We also find evidence that larger banks in general tend to lend more in foreign currency. There is no evidence that bank cash holdings and their balances with the Central Bank affect bank lending behavior. We also evaluate whether the decision taken by the regulatory authorities in Turkey in 2009 to ban foreign currency lending to households had merits.

Suggested Citation

  • Emre Ozsoz & Erick W. Rengifo & Ali M. Kutan, 2015. "Foreign Currency Lending and Banking System Stability : New Evidence from Turkey," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 15(2), pages 1-29.
    • Handle: RePEc:tcb:cebare:v:15:y:2015:i:2:p:1-29
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    File URL: https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Central+Bank+Review/2015/Volume+15-2/
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    Citations

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    Cited by:

    1. Sui, Meng & Rengifo, Erick W. & Court, Eduardo, 2021. "Gold, inflation and exchange rate in dollarized economies – A comparative study of Turkey, Peru and the United States," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 82-99.
    2. Yilmaz, Fatih, 2020. "How do credits dollarize? The role of firm’s natural hedges, banks’ core and non-core liabilities," Economics Letters, Elsevier, vol. 188(C).
    3. Annamaria De Crescenzio & Etienne Lepers & Zoe Fannon, 2023. "Assessing the Effectiveness of Currency-Differentiated Tools: The Case of Reserve Requirements," International Journal of Central Banking, International Journal of Central Banking, vol. 19(5), pages 439-492, December.
    4. Nilgun Caglarirmak Uslu & Sevcan Kapkara, 2019. "The Determinants of Credit Dolarization: Turkish Case," Economics Literature, WERI-World Economic Research Institute, vol. 1(2), pages 148-167, December.

    More about this item

    Keywords

    Dollarization; Foreign currency lending; Banking system stability;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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