ABSTRACT
C. Emre Alper, M. Hakan Berument and N. Kamuran Malatyali
Abstract: This chapter uses an unbalanced panel of observations on Turkish commercial banks over the period from 1988-99, attempts to define the structure of the banking sector through descriptive statistics and panel regressions and forecasts the changes that will take place in the banking system based on these. We follow the methodology of Demirgii^ and Huizinga (1999) closely, but instead of a cross-country analysis, we focus on issues pertaining to Turkey undergoing the ambitious three-year stabilization program. The descriptive analysis of the commercial banks operating in Turkey during 1988-99 points to the following facts: the chronic inflation of the past 15 years and the resulting high real interest rate have displaced income from core banking activities by arbitrage income through open positions. The prevailing high net interest margins allowed for the existence of large number of small banks and persistent net losses from non interest related activities. The foreign banks in such an environment did not need to increase their size since scale economies did not matter as evidenced by the highest before tax profits accruing to smaller size banks. 1
1. Introduction
On February 21, 2001, Turkish authorities announced the forced abandonment of the pegged exchange rate regime, which was in effect since the launching of the International Monetary Fund-backed three-year stabilization program at the end of 1999. This announcement came following the acute liquidity crises of November 2000 and February 2001, which threatened the viability of the Turkish banking system as a whole. The financial turmoil following the abandonment of the pegged exchange rate regime necessitated a revised disinflation program, which is likely to put an end to poor banking practices and deficiencies in supervision by
prompting rapid consolidation and taking actions to boost profitability of the banking sector.
