The determinants of credit risk in Turkish banking sector: Does efficiency matter

The aim of this thesis is to analyze the bank-specific and macroeconomic determinants of credit risk (i.e., non-performing loans) of the commercial banking sector in Turkey over the period 2002 and 2015. The sample data includes the 23 commercial banks, which represents the 90 % of the total banking sector in Turkey. By employing traditional pooled OLS, fixed effect (FE) and random effects (RE) estimators we found significant evidence both with bank-specific and macroeconomic factors. The empirical findings of this thesis is important mainly for the policy makers within financial institutions, bank regulators and bank managers. Accordingly, we found great deal of evidence between efficiency and credit risk. In other words, high technical efficient commercial banks tent to make high quality loans and thus, have better asset quality. We surprisingly found that the rapid growth of commercial and consumer loans over the last decade did not adversely affected the credit risk of commercial banks in Turkey. State-owned banks are found more prone to have higher degree of non-performing loans compared to domestic and foreign private banks. The Global Financial Crisis (GFC) in late 2008 unfavorably influenced the credit risk. Besides the bank-specific (internal) factors we had significant results with macroeconomic factors. Each macroeconomic factor have different effects on the level of non-performing loans. We found negative link between Growth rate of GDP (business cycle) stock market index (BIST 100) and level of credit risk and positive relationship with unemployment, interest and exchange rates and credit risk. Keywords: Credit risk, Technical efficiency, Macroeconomic factors, Panel data analysis.