The Effect of Exchange Rates on the Performance of the Banking Sector; The Case of Turkey (2007-2016)

Abstract

Turkey, an emerging market economy, has undergone a slowdown in the economic growth and experienced an excessive currency depreciation during recent years. High sensitivity to exchange rate leads to volatility in the banking sector and affects the monetary system and the banking activities. The analyses of the exchange rate and the banking crises are mostly focused on the relationship between these two, and neglect the impact on the banks’ performance, while the exchange rate fluctuations are highly influential on the banks’ performance. The present study is an attempt to fill this gap in the analyses. A sample including monthly exchange rate data between 2007 to 2016 and banking system data such as net interest margin, return on assets, and return on equity are analyzed. In the analysis, Pesaran and Shin (1999) and Pesaran et al. (2001) proposed the ARDL model to be used. The findings showed that there is no long-term relationship between exchange rates and the performance of the banking system. Thus, it is concluded that the sector is resistant to exchange rates. The Turkish banking sector will be able to attain a more robust infrastructure by concentrating in the futures market, implementing restrictive regulations on transactions sensitive to exchange rate risk and accelerating the compliance process with the Basel III standards.