The relationship between banking regulations and profitability of sector: Astudy on the Turkish banking sector

Banking regulations aim to protect stability of financial markets by making banking efficient and trustworthy. In banking system each intervention has an economic effect on the market. Therefore, it is important that stability-oriented banking regulations should be examined as how they affect profitibility of banks. This study aims to assess how banking regulations affect banking profitibility and their market behaviour. In this study, relation between core banking regulation tools defined as capital adequacy, liquidity, total provisions and profitability of banking was researched. Turkish Banking sector quarterly data for the period 2002-2014 was analysed by using Granger Causality Test based on VAR method. Subsequently, by using sequence-response and variance decomposition analysis method, each banking regulation was studied about to what extent they had an effect on banking sector profitability. In practice, it was observed that change in banking regulation tools had an immediate changing effect on the banking profitability and this effect disappeared in the same period. While the ultimate aim of financial regulations is to ensure stability, it was concluded that in the long term these regulations do not have any effect on banking profitability. Econometric results obtained was also examined within the context of Competition Board's decision about market behavior of banks. When both econometric results and decisions in legal nature are taken together, it is possible to put forward that for stability regulations to be effective, market behaviour of banks should closely be monitored. Keywords: Turkish Banking System, Banking Regulation, Profitability, Competiton, Var Analysis.