The Role of banks in Turkish capital markets

ABSTRACT Economic theory, has not focused on the effect of the financial system on economic growth. Since money supply is assumed as the external in the monetary theory, the significance of the financial system in the economy has been ignored. However it is needed to comprehend the financial system in order to understand the monetary growth in the economy. The researches on this issue have begun since mid 1950's The consequences of these researches have been implemented by regulations in the financial system particularly after the collapse of the Brett on Wood's monetary system. So the capital markets in the countries' economies have become important. Developed countries' banks have been concentrated on the capital marketing transactions and thus the difference between commercial and investment banking has diminished. But the commercial banks in the capital markets of the developing countries have become important Turkey has begun to apply these policies by setting free interest rates in 1980 and legislating this area, i.e., making The Capital Market Law in 1981. In this period, the banks which appeared as "trust" institution, have also played a crucial role in the development of capital markets. High inflationary pressure on real economy and the volatility in the indicators of the financial system due to this pressure caused to financialisation which means that the founds change hands in the financial system and to currency substitution which means that domestic economic agents hold foreign currency in the economy. This situation has chronically worsened with the high public sector borrowing requirement. Financialisation has risen after the exchange convertibility in 1989 with the increases of exchange rates and interest rates operations in the balance sheet off, and also after 1992 with the increases of repo and "asset baked securities". This situation substitutes investment banking related to capital markets operations with deposit banking in the Turkish banking sector. The Financialisation has caused the increase of the securities portfolio in the commercial banks' assets. But the changes of the interest revenue of securities portfolio do not determine the changes of total interest revenue II