The interaction between credit cycles, financial stability and macroprudential policies in Turkey

Prior to the 2008 global financial crisis, low interest rates led to excessive credit utilisation and increasingly lower credit standards and unmonitored loans exposed banks to credit risk. This situation increased the systemic risks in the banking sector and resulted in the financial crisis. After the crisis, it was realised that focusing on price stability was not enough to ensure financial stability and central banks changed their policies and adopted financial stability as a policy objective. Macroprudential policy instruments are used to prevent the risk of deterioration of financial stability in the face of credit cycles and systemic risks and to ensure the sustainability of financial stability. In this study, the interaction between credit cycles, financial stability and macroprudential policies in Turkey is investigated by using the local projections method with monthly frequency data between 2008:01-2023:12. To this end, firstly, the financial stability indicator (FSI) is constructed taking into account the characteristics and different components of the financial system in Turkey, and then the credit cycle (CYCLE) is obtained using various filtering methods. Then, when the functional form, direction and transmission mechanism of the relationship between the variables are not fully known, analyses are carried out with the local projections method, which has recently been preferred. According to the results obtained, a positive shock to capital buffers, credit concentration, financial leverage, required reserve ratio and money market position affects financial stability and the credit cycle as expected, while a positive shock to FX position risk does not affect the credit cycle.