Liquidity risk and liquidity regulation in banking: Applications on Turkish banking sector

The creation of liquidity and the distribution of risk to different parties are two of the most fundamental functions of banks in the financial system. The prospect of effectively fulfilling these two functions has once again emerged in the ongoing global economic crisis, which began in 2007 and the effects of it are still continuing. Basel III regulations put forward by the Basel Committee reveal significant innovations in managing both credit and liquidity risk. These new regulations will significantly impact the banks' business processes and risk management capacity at the same time. The Committee has introduced two new ratios to improve the quality of liquidity management so that the banks in the short and long term aim to develop better practices in liquidity management. The purpose of this study is to explain the situation of the Turkish Banking Sector in context of current and planned international regulations, revealing the sector's situation in case of a crisis beyond the assumptions of the ratios in the regulatory requirements and examine the determinants of liquidity buffers in the sector. In this context, the financial and regulatory liquidity ratios were analyzed within the framework of liquidity analysis of the sector and net stable funding rate, which is not yet applied in the world, was calculated for the year 2016 and the stress test was applied on this ratio. Then, in order to determine the liquidity buffers of the Turkish Banking Sector, seven models were created using System Generalized Moments Method in line with the annual data set for the period of 2013-2016. As a result of the study, it has been determined that the Turkish Banking Sector can not realize the net stable funding rate under the stress conditions within the legal limits. The model results show that from banking variables; asset size, profitability, capital adequacy and non performing loans, from macroeconomic variables; crisis, GDP and inflation are determinants of liquidity buffers in Turkish Banking Sector. Key Words: Liquidity Risk, Turkish Banking Sector, Liquidity Stress Testing, Generalized Moments Method