The realationship between financial stability and banking system: Analysis for Türkiye

The financial system encompasses all markets where all kinds of buying and selling transactions take place under a set of rules and regulations. A well-developed financial system is very important for national economies. As a result of shock waves in the financial system, serious deterioration may occur in the real economy. Identifying and responding to risks in advance has become crucial for ensuring financial stability. The biggest element of the financial system is the banking system. Banks are crucial for the monetary transmission mechanisms in line with the monetary policy implemented. The ability to observe the risks to which the banking system may be exposed in advance is very important for banking performance. Good performance of the banking system has a positive impact on GDP and financial stability through investments as a result of efficient use of funds. In this study, the causality relationship between the financial stability indicator and the banking performance indicator for Turkey is analyzed through the Granger causality test for the period between 2006 and 2023. According to the findings of the analysis, the direction of causality is from banking performance indicator to financial stability. In other words, positive shocks to the banking performance indicator have a positive effect on financial stability indicators. The findings of the study support the main hypothesis of the study and it is concluded that the most important endogenous variable in terms of financial stability is the banking performance indicator.