Abstract:

This paper analyzes non-performing loans in the Turkish banking sector with a special focus on the role of financial conditions after the global crisis. In doing so, the empirical framework shows that the determinants of non-performing loans have changed after the crisis. In particular, non-performing loans are mostly shaped by bank-specific factors before the crisis, whereas these variables have a reduced effect after the global crisis. This finding is attributed to global developments in this period, which certainly had effects on both global and domestic financial conditions. The inclusion of financial conditions index as an additional regressor in the post-crisis episode also confirms this finding by yielding a statistically significant coefficient while the sign of the coefficient implies that tighter financial conditions cause higher non-performing loans. This supports our view that financial conditions take account for the dynamics of bad loans after the crisis. In the upcoming period, the course of global policy normalization may affect and even tighten financial conditions, thereby causing non-performing loans to gain momentum. All these analysis results signal challenges and prospects regarding the maintenance of financial stability and the conduct of monetary policy.

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