Turkish Banking Sector Faces High Systemic Risk

The Turkish banking sector is facing significant systemic risk, with several major banks contributing to the country’s financial stability. According to a recent study, seven of the largest banks in Turkey are defined as systemically important institutions (D-SIBs), accounting for 71% of the sector’s total loan size and 78.5% of its total deposits.

What is Systemic Risk?

Systemic risk is a critical concern for financial regulators as it can have far-reaching consequences for the economy. It refers to the risk that one or more banks fail, causing a cascade effect that destabilizes the entire financial system.

Key Findings

• Seven of the largest banks in Turkey are defined as D-SIBs, accounting for 71% of the sector’s total loan size and 78.5% of its total deposits.
• Garanti Bank, Akbank, Yapı Kredi, and İşbank were found to have the highest systemic importance due to their large size, strong financial positions, and significant market presence.
• Public banks tend to have lower risk and spillover risks compared to large private banks.

Methodology

The study used the Component Expected Shortfall (CES) method to determine a bank’s contribution to the overall systemic risk of the banking system in Turkey. The CES approach measures a bank’s size, capital adequacy ratios, leverage ratios, and total assets to estimate its systemic importance.

CES Method

• The CES approach extends the traditional Expected Shortfall (ES) approach, measuring the expected loss that exceeds a given threshold, to the case where the loss is composed of multiple components.
• The study defined the value-weighted return for the Turkish financial system as follows:
  • r_m_t = ∑ i=1^n wi*t ri
  • where wi is the weight of the ith company in the banking system related to market capitalization and ri is the company i return.
• The distressing case was specified by C as a threshold, and the conditional ES was calculated as follows:
  • E[S|rt] = ∫[−∞, rt] (S|r) * f(S|r)dS
  • where S is the loss, r is the return, and f(S|r) is the probability density function of S given r.

Conclusion

The study highlights the importance of regular monitoring and evaluation of the systemic importance of banks in Turkey, particularly those with significant market presence and strong financial positions. The findings suggest that policymakers may want to consider the differences between public and private banks when designing regulations for the banking sector.