Abstract:

This study aims to analyze the relationship between the banking fragility index (BFI) and economic activity in Turkey. We use the monthly data for the period of 2005-2016. The BFI is composed of non-performing loans, capital adequacy ratio and net profit or lost for the period. Industrial production index growth rate (IPI) is used as a proxy for economic activity. Firstly, the financial ratios have been standardized to define in the same unit and the BFI is constituted by using the principal component analysis. Afterwards, Granger causality analysis conducted to test the existence of causality between the BFI and the IPI. Lastly, vector autoregression (VAR) model is employed to see the dynamic relationship between the BFI and the IPI variables. According to the results, the BFI has not significant influence on the IPI. However,  the IPI impacts on the BFI. Granger causality and VAR analysis results are compatible with each other.

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