The effects of the CBRT's maximum interest rate regulations on the financial performance of banks: An application on the Turkish banking sector

The purpose of this study is to examine the effects of the CBRT's maximum interest rate regulations on the financial performance of the Turkish Banking sector. In this study, both the enactment of the regulations and the effects of the rate changes were measured. A multivariate regression analysis model has been formed by using the ordinary least squares method to perform this study. The data of the Turkish banking sector for the period between January 2005 and April 2018 were used for analysis. Return on assets (ROA) and return on equity (ROE) are used as financial performance indicators of the sector. A total of 12 bank specific and macroeconomic independent variables were included as determinants of financial performance. The empirical results of the study revealed that the enactment of the maximum interest rate regulation decreased return of assets but had no significant effect on the return on equity. Between 2006-2013, the relative decrease in the maximum interest rate had a negative impact on the financial performance of the sector, since the loans subject to the maximum interest rate were more profitable than the loans not subject to the maximum interest rate. Between 2013-2018, the relative decrease in the maximum interest rate caused the loans subject to maximum interest rate to not be profitable sufficiently. As a result, banks tried to increase their profitability by reducing the supply of loans subject to maximum interest rate. The increase in the ability to substitute between maximum interest loans and non-maximum interest loans is considered to contribute to this effort.