Sovereign Risk and Bank Lending: Evidence from 1999 Turkish Earthquake

59 Pages Posted: 13 Jun 2016

See all articles by Yusuf Soner Baskaya

Yusuf Soner Baskaya

Government of the Republic of Turkey - Central Bank of the Republic of Turkey

Sebnem Kalemli-Ozcan

University of Maryland - Department of Economics; National Bureau of Economic Research (NBER); Koc University, Graduate School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: June 2016

Abstract

We investigate the effect of sovereign risk on banks' credit provision. We use the August 1999 Marmara Earthquake as an unanticipated exogenous fiscal shock that led to an increase in Turkish government's default risk. Based on administrative data on the universe of banks, we find that banks with higher exposures to government bonds before the earthquake suffered a bigger shock to their balance sheet and decreased lending more than the banks with lower exposures, after the earthquake. A bank that holds half of its total assets in government bonds decreases lending to private sector, measured as private sector loans to asset ratio, 2.5 percentage points. We show a similar effect on foreign banks' lending outside Turkey, where these banks also had high exposure to Turkish government bonds pre-earthquake, easing concerns on earthquake driven changes in credit demand. Our estimates, which trace the impact of an exogenous 100 basis point increase in sovereign spreads due to earthquake to credit supply by banks, explain 55 percent of the actual decline in loan provision during July-October 1999. These findings show that bank-sovereign doom loop can be responsible for a large fraction of credit crunch during an actual sovereign debt crisis.

JEL Classification: E32, F15, F36, O16

Suggested Citation

Baskaya, Yusuf Soner and Kalemli-Ozcan, Sebnem, Sovereign Risk and Bank Lending: Evidence from 1999 Turkish Earthquake (June 2016). CEPR Discussion Paper No. DP11313, Available at SSRN: https://ssrn.com/abstract=2795075

Yusuf Soner Baskaya (Contact Author)

Government of the Republic of Turkey - Central Bank of the Republic of Turkey ( email )

Anafartalar Mah. İstiklal Cad. No:10
Ulus, Ankara 06050
Turkey

Sebnem Kalemli-Ozcan

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Koc University, Graduate School of Business ( email )

Rumelifeneri Yolu
34450 Sar?yer
Istanbul, 34450
Turkey

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
0
Abstract Views
197
PlumX Metrics