Macroeconomic and bank specific factors' impact on credit risk in commercial banks – The case of Turkey

Banking system plays a very important role in the financial system of a country and also can have impact on financial stability. In a globalized world where the banks in the banking sector are interdependent and large banks are linked to the entire economy, risks threaten individual banks, national and international financial systems. The changing economic environment and the specific characteristics of the banks are thought to affect the risks and performance of the banks. Credit risk or credit default risk is one of the risks mostly exposed by banks, and many researchers argue that credit risk triggers bank crises. Identifying the determinants of credit risk can help to better manage and minimize risks. Factors that may affect credit risk are classified as macroeconomic and bank specific factors. The aim of this study is to estimate the statistical relationship between macroeconomic and microeconomic factors (bank-specific factors) and credit risk in commercial banks of Turkey. The study investigates the relationship between credit risk and 6 macroeconomic, as well as 5 bank-specific factors, in total 11 independent variables during 2007-2018 on a monthly based data. The empirical results presented in this study, reveal the factors affecting the credit risk in commercial banks in Turkey and explain how these factors affect credit risk. Except for the Industrial Production Index, which is used as an indicator of economic growth, all other factors have an impact on the NPL ratio. This effect is positive for real interest rate, unemployment rate, bank profitability, inefficiency and leverage ratio, while there is negative impact of exchange rate, inflation rate, M2 money supply, bank size and capital adequacy ratio on credit risk. Keywords Credit risk, Banking sector, Macroeconomic factors, Bank-specific factors, Time series analysis