Financial Crises and Capital Buffer: Evidence from the Turkish Banking Sector

Abstract

Global developments following the collapse of U.S. housing and mortgage system with the triggering effect of the bankruptcy of Lehman Brothers led to an unavoidable global financial crisis. Crisis spread to other countries swiftly, thanks to globalization and securitization of the risky assets. The liquidity shortage and trust erosion among banks blocked interbank transactions. Off-balance sheet vehicles and conduits also created more burdens on bank’s liquidity and capital needs. Banks made best endeavor to sell their assets to increase their liquidity but this led to the widening of the liquidity crises and spread to stock and bond markets. In local terms, following the banking and liquidity crises, especially the drastic ones in 2000-2001, Turkish banking sector has learned a lot and has developed substantial amount of precautionary and structural measures towards the crises. In this study, the authors have explored capitalbuffering approach as one of the precautionary measures of Turkish banking sector during the latest global financial crises. This study has been conducted with the gathered data from 1997 to 2004 and provides insights about the Turkish banking sector’s capital buffer utilization as a precautionary measure before and during the crises times. According to the first classification by bank types, the findings indicate that development and investment banks prefer highest capital buffer. State-owned deposit banks, on the other hand, are the ones with negative capital buffers in average terms. The article finds out that capital buffers in Turkish banking system has been rocketed by the 2001 restructuring program of the Turkish banking sector. When the authors exclude the banks transferred to the Savings Deposit Insurance Fund, capital buffer of the Turkish banking system was well above those of the European banking sector. The findings regarding the cyclical behavior of capital buffers in Turkish banking system, indicates that privately-owned deposit banks and large banks fluctuate pro-cyclically. Except the crises in the years of 2000 and 2001, development and investment banks are found to be pro-cyclical in their movement, as well. Likewise, total sample, excluding banks under the control of the Savings Deposit Insurance Fund, is fund to be pro-cyclical in its movement, except years 2000 and 2001. Small- and medium-sized banks move pro-cyclically except pre-crises year of 1999 and crises years. Only banks under the control of the Savings Deposit Insurance Fund are found to move counter-cyclically. Finally, total sample moves pro-cyclically except pre-crises year of 1999 and crises years of 2000 and 2001. It can be concluded with the provided evidence that the Turkish banking sector utilizes capital buffer as a precautionary measure against the financial crises.