Bank ownership and lending dynamics: Evidence from Turkish banking sector

Abstract

The principal aim of this paper is to examine whether the bank ownership structure leads to differences in the lending dynamics of banks during the various phases of the business cycle. To elaborate on this question we make use of a bank-level panel data set which comprises of the monthly financial statements of public banks, domestically owned private and foreign-owned banks for the period between 2005 and 2019 operating in a large emerging market, Turkey. We exploited panel fixed effects methodology with a large set of macroeconomic and bank-level controls in various specifications. The results of our analyses demonstrate that public banks are less pro-cyclical in lending credits compared to private and foreign-owned banks by smoothing credit cycles during the upturns and downturns in the business cycle. This behavior strengthens during the recessions and financial distress periods as public banks lend significantly higher than domestic private and foreign-owned banks. Furthermore, the impact of bank ownership on credit allocation differentiates by the type of financial distress. If the source of the distress is global, foreign banks do not behave significantly differently from domestic private banks and during the local distress, foreign banks cut lending significantly more than domestic private and public banks. Overall, our findings suggest that while domestic private and foreign banks’ lending behavior is pro-cyclical with economic activity; public banks play a stabilizing role when financial conditions tighten or the economy overheats.