Depository banks were trapped high inflation into cost inefficiency: The Turkish experience

Date
2010
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Source Title
International Research Journal of Finance and Economics
Print ISSN
1450-2887
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Volume
44
Issue
Pages
105 - 111
Language
English
Type
Article
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Abstract

Turkey embraced its worst banking crisis in the year 2001 after a long history of high inflation. Only one-third of the private domestic banks could survive immediately before and then after the crisis, mainly because of cost inefficiencies. We argue that many bank managers were trapped into cost inefficiencies during the high inflation years because they over-expanded with many new branches, looking for additional costly scarce funds in order to invest in government's securities for exuberant profits. Based on a stochastic total cost frontier with inefficiency effects (CIE) model, bank samples provide strong evidence that investing more in government securities during high inflation periods is highly significant in explaning cost inefficiency differentials among banks, in contrast to low inflation periods. A policy implication is that when inflation subsides rapidly, banks which invest heavily in government securities under high inflation are confronted with financial deterioration since they cannot adjust their cost structure, e.g., by closing several of their branches, in line with revenue losses. © EuroJournals Publishing, Inc. 2010.

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Keywords
Cost inefficiency, Inflation, Turkish depository banks
Citation
Published Version (Please cite this version)