Macroprudential policy and financial stability: The Turkish case

In this study the relationship between macroprudential policies and financial stability is clarified and the efficiency of macroprudential policy on the financial stability is investigated by using vector error correction methodology (VECM). Estimations are realized for the period 2010-2017 with the monthly frequency data. For this purpose a composite financial stability indicator which represents the health situation of the financial system is formed and an estimation model is generated. In the calculation of the FSI values, a weight vector is obtained by using indicators representing the banking sector return on assets, one-year consumer loan interest rate, credit volume of domestic banking sector and basket exchange rate. Banking sector credit concentration, net position of interbank money market, leverage ratio, capital buffers, reserve requirements and foreign currency loan limits are used as macroprudential policy indicators. According to results obtained from VECM model, the ratios which represent concentration of credit and the capital buffer provide a favorable contribution to financial stability while the variables representing the leverage ratio and the net position of banking system in interbank money market negatively affect the financial stability. The study concludes that use of macroprudential policy contributes positively to financial stability and monetary policy should be supported by macoprudential policy instruments. Keywords: Macroprudential Policy, Financial Stability, VECM model.