Market discipline in banking: Applications on Turkish banking sector

The Basel Committee has begun discussing market discipline application effectiveness in academic studies in the context of risk management of financial markets, with the concept of market discipline and public disclosure as the forefront of the 'third pillar' framework. In the researches carried out before the financial crisis in 2007, the existence of market mechanism in the developed financial markets has been revealed. In the case of emerging markets, different results are obtained in terms of efficiency before and after the crisis. It is known that deposits are predominant in capital structures of financial institutions operating in developing countries. The maturity mismatch arising from the use of short-term funds such as deposits in the financing of long-term consumer and commercial credits constitute a major risk for banks and deposit holders. Depositors can choose to direct their deposits to safer banks or claim higher risk premiums because they do not want to lose their savings if they believe the banks are going to be in a risky situation. For this reason, when the effectiveness of the market discipline is tested, it is frequently referred to depositors as a source in terms of interpreting market signals. The aim of this study is to test market discipline effectiveness in deposit banks in the Turkish Banking Sector. In the study, the effect of bank risk variables on the deposit interest rate and the amount of the public banks were examined using the Panel Fixed Seemingly Unrelated Regression Method (SUR) in the quarterly data set for the period 2003-2016. With the annual data set for the same period, the effect of the 2007-2008 Global Financial Crisis on the banking sector was tested using the Generalized Method of Moments. At the end of this study, selected macroeconomic variables indicate that the inflation variable has the greatest effect on the interest rate and that the effectiveness of the market discipline can be realized in the direction of credit risk and insolvency. Keywords: Market Discipline, Turkish Banking System, Risk, Apparently Unrelated Panel Fixed Methods, Systemized Generalized Moments Method