Abstract:

This paper investigates the effects of sudden stops and international reserves on bank lending in a bank-based emerging market economy, Turkey. It includes a panel of deposit banks in Turkey over the period 2003-2013. Using a system GMM estimation technique, we find that sudden stop of capital inflows has led to deterioration in bank lending. Moreover, the results reveal that over the sudden stop periods higher international reserves held by the Central Bank have served as a buffer and prevented decline in bank lending. Another striking feature of the findings is that higher liquidity and higher deposit ratio have encouraged bank lending over the sudden stop periods whereas higher capitalization ratio placed a reverse impact on bank lending. Overall, we expect that the results provide important implications for similar emerging market economies which have fragile economic structures.

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