The nexus between foreign exchange rate and non-performing loans: The case of Turkey

In the global conjuncture, non-performing loans are defined as an indicator of asset quality of bank balance sheets. In particular, in the countries where the financial system is quite important such as Turkey, the occurrence of deterioration in the quality of bank assets affects the entire economy as well as financial markets. The objective of this study is to investigate the association between exchange rate and non-performing loans that has become a current issue because of exchange rate shocks in Turkey for the period of 2005:Q4-2017:Q4 by applying ARDL analysis method. In the research paper, firstly, loans and non-performing loans are discussed and the position of non-performing loans in Turkish banking sector is examined. In the second part, exchange rate and important issues related to exchange rate are explained. In the third part, the related theory and literature research is given. In the literature research, it is stated that there is a strong relationship between exchange rate and non-performing loans. Lastly, empirical findings are given and the relationship between the variables is analysed econometrically. In this paper, as the analysis method ARDL boundary test approach is applied. With the ARDL method, the cointegration relationship can be determined although the variables become stationary at different levels. Furthermore, the error correction model established within the scope of ARDL analysis provides for both short term and long term information about the variables. Another feature of the ARDL analysis method is that it gives consistent results in spite of small number of observations. In the analysis part of the study, within the scope of ARDL cointegration test, firstly the boundary test is employed and the existence of the interaction in the long-run is detected. After determining the cointegration relationship, ARDL model is conducted and the relationship between the variables is analysed for long and short term. On the basis of the findings, it is concluded that an increase in the real effective exchange rate cause non-performing loans to increase both in the long and short term.