Foreign Currency Lending and Banking System Stability - New Evidence from Turkey
28 Pages Posted: 14 Dec 2012
Date Written: November 5, 2012
Regulators in developing countries have started to strict banks' foreign currency (FC) lending. Following others, in June 2009, in what is considered "a surprise development" the Turkish Government removed a provision from its existing laws that had allowed Turkish residents to borrow in foreign currency from banks operating in Turkey. The development ended a long era of foreign currency lending for consumer loans. This paper studies the determinants and consequences of foreign currency lending for banks in Turkey in the run-up to this significant policy change. By using detailed balance sheet data on the Turkish lira and foreign currency composition of bank assets and liabilities between 2002 and mid-2009 when the policy change was initiated, we evaluate the drivers of FC lending by banks in Turkey along with consequences for the banking system in particular and for the economy in general. We highlight possible risks to the Turkish banking system as a result of the system's heavy exposure to exchange rate and default risks. In doing so, we show that the policy change was not necessarily a surprise but a cautionary step in the right direction to help keep Turkish banking system stable.
Keywords: Dollarization, bank performance, banking system stability
JEL Classification: F31, G21, 024
Suggested Citation: Suggested Citation