Fed Rate Hikes and the Effects on Turkish Banking System. Could It Catch a Cold This Time?

Abstract

Could a Fed rate hike affect Turkish banks' stock prices? Could it lead to an increase in the exposure to interest rate risk of Turkish banks, generating negative spillover effects? By means of a new data-rich environment IVAR model with both observables and latent factors for a panel of 18 countries (iDREAM), we estimate the spillover effects of a Fed rate hike on the Turkish economy through a generalized impulse response analysis with sign restrictions. Then, we use a Kalman filter to assess Turkish banks' stock log-returns sensitivities to both iDREAM variables (business cycle, prices, real effective exchange rate and monetary policy) and Nelson-Siegel latent factors of the Turkish interest rate term structure (so-called, level, slope and curvature). Finally, we investigate how the time-varying sensitivity depends on bank-level characteristics and bank-ownership over the period 2006-2017. Our preliminary findings show a strong relationship between Nelson-Siegel latent factors and banks' stock log-returns. In particular, a change in the level has significant effects on the Turkish banking sector, while the other latent factors of the yield curve have only modest effects. Moreover, banks with larger balance sheets, higher capital ratios and higher short-term debt or deposits are less sensitive to level changes.