The impact of a disinflation program on the structure of the Turkish banking sector: evidence from 1988-1999

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 Demirgüç 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 noninterest 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.