Financial Sector Deepening and Economic Growth: Evidence from Turkey

This paper analyzes the effects of financial sector deepening on economic growth using a province-level data set for 1996-2001 on Turkey. This period is associated with a weakly regulated and relatively unsupervised expansion of the banking sector which led to the 2001 financial crisis. Contrary to findings in the previous literature, our results indicate a strong negative relationship between financial deepening-both public and private-and economic growth. In light of the developments in the period of analysis, this result is not surprising, as the main function of the banking sector at that time was to provide financing for the Turkish Treasury, which channeled these funds to the government-albeit mainly for rent distribution purposes. However, it is important to note that the growth of private banking sector needs yet to be examined separately, as government ownership of banks may distort the development of the banking sector as a whole. Yet, it is possible to conclude that financial development may not always contribute to economic growth, and the conditions under which such a contribution takes place should be investigated further.Financial sector; Economic growth; Panel data; GMM; Turkey

Leverage, Balance Sheet Size and Wholesale Funding

Some evidence points to the procyclicality of leverage among financial institutions leading to aggregate volatility. This procyclicality occurs when financial institutions finance their assets with non-equity funding (i.e., debt financed asset expansions). Wholesale funding is an important source of market-based funding that allows some institutions to quickly adjust their leverage. As such, financial institutions that rely on wholesale funding are expected to have higher degrees of leverage procyclicality. Using high frequency balance sheet data for the universe of banks, this study tries to identify (i) if such a positive link exists between the assets and leverage in Canada, (ii) how wholesale funding plays a role for this link, and (iii) market and macroeconomic factors associated with this link. The findings of the empirical analysis suggest that a strong positive link exists between asset growth and leverage growth, and the use to wholesale funding is an important determinant of this relationship. Furthermore, liquidity of several short-term funding markets matters for procyclicality of leverage.Financial stability; Financial system regulation and policies; Recent economic and financial developments

Household Insolvency in Canada

With increasing levels of household debt in recent years, the number of households that may be vulnerable to a negative economic shock is rising as well. Decisions made by both the debtor and the creditor can contribute to insolvency. This article presents some stylized facts about insolvency in Canada’s household sector and analyzes the role of creditors in insolvencies. The average debt of an individual filing for bankruptcy is more than 1.5 times that of an average Canadian household; bankruptcy filers tend to be unemployed or in low-wage jobs, and are typically renters. The article reports that banks that approve more loans per branch, which is interpreted as less-intensive use of soft information (such as the loan officer’s assessment of the applicant’s character), experience more client bankruptcies. This finding has important policy implications, because financial institutions that do not use soft information risk further deterioration in their lending portfolios.

Consumer Bankruptcy, Bank Mergers, and Information

This article analyzes the relationship between consumer bankruptcy patterns and the destruction of soft information caused by mergers. Using a major Canadian bank merger as a source of exogenous variation in local banking conditions, we show that local markets affected by the merger exhibit an increase in consumer bankruptcy rates post-merger. The evidence is consistent with the most plausible mechanism being the disruption of consumer–bank relationships. Markets affected by the merger show a decrease in the merging institutions’ branch presence and market share, including those stemming from higher switching rates. We rule out alternative mechanisms such as changes in quantity of credit, loan rates, or observable borrower characteristics.David Martinez-Miera acknowledges Financial support from Banco de España "II Programa de Excelencia en Educación e Investigación", Fundación Ramon Areces and Ministerio de Ciencia e Innovación "ECO2013-42849-P" and "JCI-2011-08963

The effects of shared ATM networks on the efficiency of Turkish banks

This study investigates whether forming shared ATM networks has yielded positive benefits for banks in Turkey by increasing their productive efficiency. Using a Data Envelopment Analysis (DEA) approach, pure technical and scale efficiency scores of Turkish banks are estimated and analysed for the period 2000–2003. The results suggest that although it is possible to realize positive effects through ATM sharing arrangements, there are multiple factors that determine which banks realize such benefits. The geographical distribution of shared ATMs between urban and rural markets and the level of competition between banks within urban areas are shown to be important determinants of differences in bank efficiency. This discrepancy between the gains associated with ATM sharing may have important implications concerning the adoption and sharing of new technology by banks in developing countries.

The Effect of the Iraq War on Foreign Bank Lending to the MENA Region

This paper examines whether a large geopolitical event, such as the war in Iraq, can affect foreign bank lending from developed countries to emerging markets. Using country-level data, the paper analyzes the effects of economic shocks and the Iraq war on the availability of foreign bank credit to five countries in the Middle East and North Africa. The war has had a nonuniform effect on foreign banks: Although the war has led to higher U.S. lending, it has also discouraged British and Italian banks from lending to the region. Implications concerning the stability and reliability of foreign bank credit in the face of increased geopolitical risks are identified and discussed.credit, foreign banks, Middle East and North Africa, war,