The effect of exchange rate and volatility on the of performance commercial banks: An application on Turkey

Banks, whose main purpose is to make a profit, play an intermediary role in the delivery to investors of funds collected under the name of deposits from individuals and organizations. Especially in developing countries such as Turkey, mostly banks to obtain these funds by borrowing from abroad and these funds lend to domestic market. Therefore, there may be assets and liabilities in foreign currency in the balance sheets of banks. This situation exposes commercial banks to exchange rate risk as a financial intermediary. The fluctuations in the exchange rate directly affect the banks transacting in foreign currency in international markets. Fluctuations in foreign exchange rates affect banks indirectly, except international transactions, it affects its customers through competition in foreign markets, credit demand and other banking activities. Knowing the impact of exchange rates on bank profitability is important in establishing an appropriate coping strategy. In this context, the effect of exchange rate and volatility on the profitability of commercial banks operating in Turkey Banking System was tried to be determined in the period range 2003: q1-2018: q3. For this purpose, three different models were created for three different bank groups in the study. These models were analyzed by estimators developed by Arellano (1987), Froot (1989) and Rogers (1993). Research findings show that there is a statistically significant and positive relationship between the real exchange rate and the performance of commercial banks (average return on assets, average return on equity and net interest margin). The findings also show that there is no significant relationship between exchange rate volatility and average return on assets and average return on equity, but there is a significant and negative relationship between the net interest margin of foreign banks and exchange rate volatility.