Deposit banks of mandatory provision ratios effect on profitability: Implementation in Turkey

In the last quarter of 2010, required reserves were introduced as a monetary policy tool to reduce macro-financial imbalances. Changes in required reserves ratios play an important role in banks' profitability by influencing loan volume. In this study, it is purposed to investigate the short and long-term impacts of the changes in the reserve requirement ratios on the profitability of the banking sector in particular for deposits banks during the periods of 2011:Q1-2022:Q1. Internal factors specific to the bank and external factors reflecting macroeconomic indicators are included as control variables in the models created to estimate the effect of reserve requirement ratios on profitability. As a result of the analysis, in which the bounds test approach and distributed lag autoregression (ARDL) method were applied, the existence of a long-term cointegration relationship between the required reserve ratios and the return on assets, return on equity and net interest margin of banks was revealed. In the long run, required reserve ratios have an increasing effect on the profitability ratios of deposit banks. Also, it can be stated that required reserve ratios affect the return on equity the most. In the short run, the required reserve ratios do not have a significant effect on the return on assets and return on equity, but they have a reducing effect on the net interest margin. Based on the results of the analysis, it has been presented as a policy proposal where the active use of required reserve ratios can have positive results in order to strengthen the banking sector, to bear the short-term losses and to have a healthier structure in the long term.