Turkish currency crisis – Spillover effects on European banks

Abstract

We analyze stock price reactions of the largest listed banks across 9 countries in Europe to the currency crisis in Turkey, on August 10, 2018. We find a statistically significant two-day cumulative abnormal return of −2.0% for the European banks, excluding banks of Turkey, using the Fama-French five-factor asset pricing model. We identify more severe stock responses in banks that have a recent increase in leverage or a decrease in liquidity or profitability. Results indicate that banks of Turkey, Greece, Netherlands, Italy, Spain, Germany and France are significantly influenced by possible loan defaults. German, French and Dutch banks could be vulnerable to the extent that their economies will support the weaker EU banks. UK and Switzerland should be immune to these pressures and therefore their banks are found relatively stable.