Monetary and Fiscal Policies

The success of any economy is often based on the political stability of any country. The government policies that are formulated by any countries leaders or economic advisers are watched and followed closely by every investor. The Economic future of a country is dictated by trading partners that are established and relationships between countries and economic blocs. As can be seen in the Turkish model, it was just in 2001 that Turkey was only meeting 40% of what the US banks were meeting.

As many of the current development projects are coming to a close, the experts are expecting that Turkey’s banking industry will be able to meet over 80% of the country’s needs. Retail banking in Turkey can provide a wide range of opportunities to the customers in order to explore when it comes to home ownership. The fragile banking system led the economic program supported by the IMF stand-by agreement to end up with twin crises, which resulted in shrinkage in banking sector in 2001. In response to severe banking crises, the government has taken a number of serious reform actions supported by the World Bank and the IMF.

These included: (i) Significant reform of prudential regulations such as new risk management legislation, inflation account legislation. (ii) Strengthening of regulatory and supervisory authority by assurance of independency of Banking Regulation and Supervision Agency (BRSA) (iii) Restructuring of private and public banks (iv) Recapitalization of the banking system (v) Debt restructuring for the corporate sector The financial liberalization attempts have promoted the development of capital markets. However, any financial sector is still dominated by banks.

The share of banking sector in total financial assets was 60% as of the end of 1997 while share of private sector in capital market was 13%. In 2002 the former ratio fell to 45% and the latter ratio fell to 8% due to the boom in government securities to cover the costs of the banking sector reform. The share of debt securities in total banking sector assets is 39% as of 2002, which still points out the high government crowding out, despite the high capital adequacy of the sector. The results of the operational restructuring in the banking sector are evident in the aftermath of the crises.

The number of banks declined from 81 in 1990 to 51 as of 2003. Following the crises and in line with the new regulations, the mergers and acquisitions gained pace and their total asset size increased to around $27 billion. In a study an attempt has been made to examine one dimension of this liberalization process, namely the impact of foreign bank entry into the financial sector. Available data shows that foreign bank entry continued steadily through the 1980s, peaking at 23 in 1990 from four in 1980. Together with 13 new local bank entries, the total number in the sector reached 56 in 1990.

In the following years, some foreign banks merged with each other or with local banks. By the end of 1997 there had been 17 net foreign bank entries since 1980. The analysis focused on three performance measures namely, net interest margin, overhead expenses and return on assets. It was found that foreign bank ownership is related to all three performance measures. The examination of the effects of foreign bank entry on domestic bank performance shows that foreign bank entry produced beneficial results.

Also the foreign bank entry had the effect of reducing overhead expenses of domestic commercial banks. When return on assets was adjusted for the effects of inflation on profits and bank capital, it was found that the impact of foreign bank entry on profits is very strong. Both measures of foreign bank penetration were negatively related to return on assets. This indicates that foreign bank entry had a strong competitive effect in Turkey. This result also shows that nominal profits and bank capital need adjustment in high inflation environments.