Panel Stochastic Frontier Analysis of Profitability and Efficiency of Turkish Banking Sector in the Post Crisis era/Turkijos Banku Sektoriaus Veiklos Pelningumo Ir Efektyvumo Analize Pokriziniu Laikotarpiu

By Aysan, Ahmet Faruk; Karakaya, Mustafa Mete et al. | Journal of Business Economics and Management, December 2011 | Go to article overview

Panel Stochastic Frontier Analysis of Profitability and Efficiency of Turkish Banking Sector in the Post Crisis era/Turkijos Banku Sektoriaus Veiklos Pelningumo Ir Efektyvumo Analize Pokriziniu Laikotarpiu


Aysan, Ahmet Faruk, Karakaya, Mustafa Mete, Uyanik, Metin, Journal of Business Economics and Management


1. Introduction

November 2000 and Februar y 2001 crises adversely affected Turkish economy and particularly Turkish banking sector. In the post-crisis period, extensive structural changes have taken place in Turkish banking sector. Interest of foreign banks for the Turkish market increased. Some new foreign banks entered into Turkish banking sector through acquisition, while existing foreign banks increased their operations. Foreign banks are expected to bring new practices and advance technology to the market and enhance competitive pressure in banking. Throughout 1990s Turkey experienced very high interest rates and accumulated huge debt stock surpassing Gross National Product. Consequently banks did not perceive any need to operate more efficiently given that they could earn enormous returns through financing government. In the post-crisis period, inflation, interest rates and debt stock started to decline. Eventually banks felt the need to rely more on essential banking activities to make more profit. Hence they had to operate more efficiently. As a result of these changes Turkish banks experienced profound transformations in their cost and profit efficiencies. These developments in cost and profit efficiencies shall have implications for the profitability of banks.

In this paper, we investigate the cost and profit efficiencies of Turkish banking sector in the post-crisis era by employing panel stochastic frontier approach. Our data set spans 2002-2007 period just before the global crisis. We further divided this period into 2 sub-periods as 2002-2005 (period of recovery and merger activities) and 2005-2007 (period of growth and acquisition by foreign banks). According to our knowledge there are studies that employ stochastic frontier approach, but this is the first study that employs panel stochastic frontier approach to analyze the efficiency of Turkish banking sector for this period. Panel data has various advantages which significantly improve efficiency analysis compared to previous studies. Moreover we explore the relation between efficiency, size and profitability. Finally state banks are quite dominant in the banking industry in Turkey. Therefore we conduct the same analysis by excluding the state banks to implement sensitivity analysis.

In this paper we address the following questions: How does efficiency change over time? Is there a substantial efficiency improvement? Does the foreign banks prefer to buy more efficient banks? Is there efficiency gain in the banks acquired by the foreign banks? Is there a relation between profitability, efficiency and size?

The rest of the paper progresses as follows: Section 2 reviews the efficiency literature in banking sector and provide an overview of Turkish case in the post crisis period. Section 3 defines the data and explains the methodology and advantages of our model. Section 4 discusses the empirical results of efficiency and its relationship with size and profitability. Lastly section 5 concludes.

2. Literature review and Turkish case in retrospect

During the crisis period in Turkey, the banks which did not employ risk management techniques effectively had maturity and currency mismatch problems in their assets and liabilities. As a result of crises, interest rates increased sharply and Turkish currency rapidly lost value against other currencies. Hike in the interest rates especially hits the banks that had maturity mismatch problem in their portfolios. As a result of the increase in the interest rates, the assets of these banks also rapidly lost value and maturity mismatch in their portfolios did not allow the value of their liabilities to decrease by the same amount. Interest rates in domestic currency was higher than the interest rates in foreign currency. Therefore most of the banks had short position in foreign currencies and long position in Turkish currency. In fact, before the crisis most of the Turkish banks had both currency and maturity mismatch problems in their portfolios. …

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Panel Stochastic Frontier Analysis of Profitability and Efficiency of Turkish Banking Sector in the Post Crisis era/Turkijos Banku Sektoriaus Veiklos Pelningumo Ir Efektyvumo Analize Pokriziniu Laikotarpiu
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