Macroprudential Policy and Financial Stability: The Turkish Case

Abstract

This study aims to analyse the relationship between financial stability and macroprudential policies in Turkey and investigate the effectiveness of macroprudential policies on the financial stability by using the vector error correction model (VECM). Estimates are realized for the 2010-2017 period by using the monthly data. For this purpose, a composite financial stability indicator (FSI) is formed and an estimation model is developed. Banking sector credit concentration, net position of interbank money market, leverage ratio, capital buffers, reserve requirements and foreign currency loan limits are used as macroprudential policy indicators. According the results obtained from VECM model, the ratios which represent concentration of credit and capital buffer provide a favourable contribution to financial stability while the variables representing the leverage ratio and the net position of banking system in interbank money market negatively affect the financial stability. The study concludes that monetary policy should be supported by macroprudential policy instrument to achieve financial stability.