The role of the banking sector in emerging market financial crises: The case of Turkey

After financial liberalization, currency and banking crises speeded up markedly for the emerging market economies. The depreciation of national currency and banking sector problems such as currency and maturity mismatches, liquidity problems-insolvency and non-performing loans are the main causes of financial vulnerability and lead the deterioration of bank balance sheets. When these vulnerabilities meet with internal and/or external shocks, banking crises erupt that are the one of the two components of financial crises. Besides, the incidence of banking crises after 1980^ is an indicator of this situation. Macroeconomic instability, global financial conditions, the structure of domestic financial system, exchange rate regime and the problems in the regulatory and supervisory system are the causes of financial crises. After 1980's the main financial crises are; Latin American Crises, 1997 Asian Crises, 1998 Russian Crises and 2001 Türkiye. The common feature of these crises are the fixed exchange regime arrangements that lead overvaluation of national currency and current account deficit. Budget deficits are also financed by the short-term capital inflows with the intermediation of domestic financial system. These inflows are directed towards to consumption boom in some countries and to speculative investments in others. The sudden reversal of capital inflows is the most important factor of the break out of financial crises. The loss in total output (GDP) and the fiscal costs of restructuring bank balance sheets make the financial crises more important. But, consistent policies that associate with macroeconomic and financial balances will decrease the probability of financial crises.