Financial fragility and early warning system

This study aims to empirically analyse the predictability of financial crises in Turkey during the period of 1994-2019, within a framework of financial fragility. The Markov Regime Change model was used for this purpose. Regression results indicate the existence of two different periods (regimes), normal and crisis. According to the model results, while interbank overnight borrowing interest, consumer loans, business confidence index and premium variables were statistically insignificant during the normal regime period, all variables included in the model were found to be statistically significant in the periods expressed as the crisis period. In particular, the business confidence index was found to be an important indicator for predicting financial crises. Moreover, it was found that the economic shock experienced in Turkey in August 2018 was more severe than the shocks from the 2008 global economic crisis. Overall, the empirical model used in this study finds that the predictability of financial crises in Turkey is effective to a large extent.