This paper is a framework to analyze competition
in the banking sector in Turkey. For this purpose, I examined 49 banks which
acted between 2005 and 2013. All data set are obtained from The Banks
Association of Turkey. I have also analyzed pre and post crisis periods as an
application of Monti-Klein profit function and translog cost function after
that Lerner Index is calculated. Also a Sperman Correlation is applied to
understand the relationship between different types of banks, and Lerner Index.
Analysis results pointed out the Lerner index has been consistently higher than
0.2 for the 9 years periods. Also, the private-owned banks have more market
power than state-owned banks for the same period. This maybe because increment
of the foreign assets in private-banks after Global Financial Crisis.
Bank Competition, Lerner
Index, Pre and Post-crisis period
A healthy economy depends on a good working
financial system without any unbalanced or any negative expectation in the
future because financial system is the first sources for the foundation of
investments. For these reasons, the efficiency of financial products
(production or services) and a competitive environment is very crucial for banking
sectors, similarly other sectors.
There are mainly two hypotheses which are used in
the literature about the relationship between competition and stability in the banking
sector. They are competition-fragility and competition-stability. First hypothesis
claims that smaller banks, in more competitive environments, are more likely to
take excessive risks and therefore competitive systems are more fragile than
less competitive systems (Matutes and Vives, 2000).
On the other hand, Boyd and De Nicolo, (2005) claims that
“there is a risk-incentive mechanism
causing banks to become more risky as their markets become more concentrated”.
The authors called it as “competition stability” suggested less competitive
banking environment may cause fragility in competition-stability hypothesis
Boyd and De Nicolo, (2005). Because a less competitive banking environments
allow banks to increase the interest rate charged to firms (borrowers), firms (borrowers)
had probably have difficulties in re-paying their loans. As consequence of it
in a higher probability of nonperforming loan ratios (NPL), and more
competitive environments are considered to be permit greater stabile banks. “Their theoretical model shows that the
higher interest rates may cause firms to assume higher risk, which results in a
higher probability that loans turn non-performing (Leon,2015). According to
Boyd and De Nicolo’ (2005) study, there is a positive relationship between bank
fragility and concentration resulting a greater probability of systemic distress
because of concentration.
There are very
broaden empirical studies in the literature. Some studies evaluate bank
fragility from a macro perspective and take into account systemic banking crises
e.g. Beck, Demirguc-Kunt and Levine, 2006. On the other hand, micro-based
studies generally support the competition-fragility hypothesis. In the banking
literature simply take the concentration ratios, while others use indices such
as the Herfihndahl-Hirschman Index (HHI), Lerner, Tobin, and Panzar and Rosse (1987)’ H-statistic.
Even if there
are very broaden empirical studies examining banking sector, it is not the case
for Turkish Banking Sector. Also Turkish economy had hit by 2 crucial economic
crises between 1999 and 2001. In 2004, Turkish economy began to stabilization. Therefore,
the primary purpose of this study to investigate whether there is a competition
environment for Turkish banking Sector after stabilization until today (see the
section II). Also, I will research the impact of 2007 Global Financial crisis.
This study is organized as follows; in the section-II the historical change of
the Turkish Banking sector is given. In the section-III, the data set is
explained, then in section IV method is represented. In section V the analyses
results are given.
Banking Sector’s History
Ziraat Bank was established to support agricultural sector in
Turkey in 1863.
After the declaration of independence of Turkey in 1923, the
development in banking sector was evaluated at Izmir Economy Congress ( Akbulak
and al, 2004).
Turkiye Is Bank which had 100% nationally capital, was
established in 1924.
Central Bank of the Republic of Turkey
is the central bank of Turkey and is founded as a joint stock company on 11
June 1930 (http://www.tcmb.gov.tr/).
Just after World war- II (1939-1945),
the depression in the market due to the war, impacted on the banking sector.
The privately owned deposit banks were
developed in Turkey between 1945 and 1959. For instance Yapi Kredi Bank,
Garanti, Ak Bank, Pamuk Banks were some of the privately owned banks established
in these periods (Akbulak and al, 2004).
Turkish Banks Association was
established in 1958. After a year, the years between 1960 and 1980 was called
“planned term”, since these 2 decades banks were controlled by the
1960-1980, 7 banks were founded by
government based on the “planned term”, 2 of them were merchant banks
and others were development banks.
With adaptation of free market economy
model in 1980’s, banking sectors’ privatization increased in Turkish Banking
1999-2001 can be considered years of transformation for Turkish
banks. In the 3 year of period, the Turkish economy had been faced by two crucial
economic crises (Yaldiz and Bazzana, 2010).
The parliament approved the new banking law (no 4389) in 1999. By
this law The Turkish government guaranteed on deposits, which had been set at
100 % for the year 1994 was restricted to 100,000 Turkish liras (TL) in 2000.
In 2001 the guaranteed deposit amount was restricted to 50,000 TL
2014). Same year, IMF started a Banking Restructuring Program purposing
efficient banking system.
According to Tunay, 2009 study the restructuring program impacted
sector in a negative way.
In Turkey, there were 81 banks operating in 1999.
After 2004, with the stabilization of the economy,
the privatization gave a momentum. Currently, 51 banks are involved in Turkish
Banking sectors, 3 of them are public deposit, 11 private deposit, 16 foreign
deposit, 4 public investment, 5 private investment, 4 foreign investment, 4
participation banks, and 2 banks under the supervision of the Savings Deposit Insurance Fund of Turkey (SDIF)
(wikipedia/list of banks).
Existence of 51 banks raised the competitive environment. A competitive area in
banking sector can lead to lower prices for services and products due to
greater efficiencies. Also, greater innovation and access to services and
products. On the other hand, banking sector extension may reduce to supervise
these institutions. For these reasons, in this paper I analyze Banking Sector’s
efficiency and the market power of Turkish banking sector.
data sets will be retrieved from The Banks Association of Turkey
(www.tbb.org.tr) which are publicly available. The data set includes between
2005 and 2013 data. Since the economical stabilization process began in 2004, so
I chose just after the stabilization term. Also, the last quarter of 2014 data
set was not available during the study period, thus I used 2013 data set. These
9 years period panel data set include all assets, deposits, funds for all 49
(excluding SDIF banks) banks. I specifically chose the 9 years period. The all
period is separated into 2 sub-groups for
evaluation the global financial crisis impacts on banks competitveness. The
first subgroup includes precrisis term (2005-2007), and the remain term is
postcrisis (2008-2013). Moreover, I examined the competitiveness among
different types of bank groups to determine their market power difference. For
this purpose, I seperated all data set as private-owned and state-owned groups.
Lerner Index1 is
widely used in the specific case of banks as an indicator of degree of
competition in banking sector. The Lerner index’s marks-up the price over
marginal cost. The value of index ranges between 0 (perfect competition) to 1
(Monopoly). In other words, Lerner index measures the monopolist’s margin.
Lerner index is calculated as follows equation-1;
Where p- price, MC is marginal cost and e is price
elasticities of demand. If p is equal MC, then the firms operate in perfect
competition (L=0). If L is greater than 0, then Lerner index indicates the
existence of market power. Thus, the
Lerner index can be explained by,
Monopoly Power (or Oligopoly Power)