Abstract
Banks constitute approximately 90% of the Turkish financial system, so an efficiently operating banking sector is essential for financial consolidation. To ensure the efficient functioning of the banking production process, capital adequacy ratio (CAR), which is a basic indicator in controlling financial risk, should be managed properly. Additionally, the production process of banks fits into a typical two-stage system, thus opening the black-box on bank efficiency is necessary for an accurate efficiency measurement. By focusing on the link between efficiency, risk and return, this study aims to present a two-stage efficiency evaluation of the commercial banks in Turkey for the year 2018. In addition to the efficiency scores, frontier projections are determined, and an examination is made on the CAR targets. The empirical findings indicate that the inefficiency in the Turkish banking sector mainly stems from the operational performance and the average efficiency score of the state-owned banks is the highest. According to the target values, a pattern is detected between the efficiency scores and CAR. We also conclude that the minimum capital adequacy of 10.5% set by Basel III is not high to guide the commercial banks in Turkey to the efficient frontier.
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