Stress testing in the banking sector: A comparison of Turkey and USA

Banks constitute a major part of the financial system. There are certain standards regulated for banks, which have a critical role in ensuring economic growth and stability, to ensure international harmonization. These standards, called Basel Criteria, aim to strengthen banks against possible crisis situations. Stress testing is an analysis to measure the vulnerability of the financial system and banks under unusual market conditions. It is conducted to determine how prepared the banking system is against possible shocks in the markets. This study was conducted on the Turkish and US banking sectors and the response of banks' NPL (Non-Profit Loans - Non-Performing Loans) ratios to shocks to macroeconomic variables was simulated using Monte Carlo simulation method. The data of the Turkish banking sector and the US banking sector for the periods 2012:Q1-2023:Q4 are used. In the modeling, the NPL ratio of banks is used as the dependent variable in line with the literature, while the USD exchange rate/index, GDP, inflation rate (CPI), interest rate, unemployment rate and M2 money supply are used as independent variables. At the end of the study, the NPL ratios of Turkish and US banks decreased in response to shocks to the USD exchange rate/index and GDP independent variables. In general, the NPL ratio of Turkish banks decreased while that of US banks increased in response to shocks to inflation. This can be interpreted as the fact that the inflation rate in the US is generally low and the markets are not used to high inflation rates. In the face of the shock-induced increase in interest rates, the NPL ratio of Turkish banks decreased, while the NPL ratio of US banks remained generally unchanged. The reason for this may be that interest rates in the US economy are generally low and the market is not used to high interest rates.