Financial Crime World

Two Main Differences Set Turkish Banking Sector Apart from Similar Studies

A recent study analyzing the financial turmoil period and its aftermath in the Turkish banking sector has identified two key differences that set it apart from similar studies.

Unique Methodologies Employed

The research used a model to predict default probabilities, employing a shorter-term structure of liabilities than usual, with a 3-month horizon instead of the typical one-year assumption. Additionally, the study used a more robust estimation method by employing the median absolute deviation to eliminate the effects of large data outliers when calculating implied volatility.

Advantages of the Robust Estimation Method

  • Produces more accurate estimates than traditional methods
  • Eliminates the effects of large data outliers

Analyzing Sector Stability

The study analyzed aggregate data from publicly traded commercial banks in Turkey to predict default probabilities, which serve as an indicator of sector stability. The sample included:

  • 28% of the total transaction volume of the Istanbul Stock Exchange (ISE)
  • Approximately 81% of all bank share transactions

Standard Normal Assumption and Limitations

While acknowledging that the model’s standard normal assumption may lead to overestimated or underestimated probability of default values, the researchers believe that the method is still useful in identifying changes in sector stability. If the probability of default increases, it may indicate a decline in sector stability, while a decrease in probability could signal an increase in stability.

Data and Methodology

The study used publicly traded bank data from 1999 to 2006 on a monthly basis. The past 12 months’ worth of market value and volatility data was used to infer monthly predictions. The risk-free interest rate was taken as the simple average borrowing rate on Turkish Treasury debt instruments with a maturity of 3 months.

  • Market values of assets and asset volatilities were derived from the model
  • Book values of debt were obtained from the Banks Association of Turkey (BAT)
  • Estimation period: 2000-2006, predictions made on a monthly basis

The study also plotted the ISE price index of publicly traded Turkish banks, which showed an upward trend until the beginning of 2000. This trend is likely to have implications for sector stability and default probabilities.

Conclusion

Overall, the study’s findings provide valuable insights into the Turkish banking sector’s stability during a period of financial turmoil and its aftermath.