The macroeconomic effects of capital regulations in banking sector: An analysis of Turkish banking sector

The main goals for economic policy makers are to achieve a low inflation rate while attaining an acceptable and sustainable rate of growth. Towards these goals monetary policy has a very important place. While there is a wide consensus of monetary policy?s short term effects, the degree of these are in debate. Hence many researchers, dwells on this flied of understanding the mechanics and/or mechanism of this policy channel. This framework comprises the broad term of monetary transmission mechanism. Within this framework, many different sub-channel constructions are observed. The differentiation of these sub-channels stems from the need of understanding the effects of different types of assets where the financial development level of a given economy imposes. Thus, the leading role of banking sector with in the financial system, brings the ?credit channel? view a bit further. Traditional credit channel, put the banking system balance sheet?s asset side in the economic system, while leaving the liabilities side away. Moreover, we see that the liabilities of the banking system becomes an academic issue or concern in the flied of ?credit crunch? and ?bank capital regulation? literature, distant from the economic policy design. In this study, a new framework is constructed with the help of credit crunch and bank capital regulation literature, where the liabilities (namely capital and deposit at this stage) of the banking system is brought in to the analysis. This new framework is then called bank capital channel. Following this construction the system is econometrically tested for all the commercial banks (31 of them) of the Turkish banking system. The results do not indicate that the relevant variable is statistically insignificant, while the sign of the coefficients are as theoretically excpected. The significance of the capital channel coefficient is expected to improve with the changing global and domestic economic environment, where the Turkish banks shall operate with lower CARs, and lower non-deposit external funding opportunities shall be available due to global financial flows. Moreover, the research period has several peculiarities, such as high global capital inflow to the banking system in particular. Apart from these developments changing regulatory environment will put more pressure on banks macro prudential indicators, as global crisis brought financial stability and macroprudentiality to the top of economic policy goals. Thus, while sole importance and significance of capital channel is expected to rise, other macro prudential indicators needs to be analyzed in similar frameworks. This need a higher quality of data available to researchers, where in this study only publicly available aggregate data were utilized due to academic restrictions.