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Tanju Çapacıoğlu

Tanju Çapacıoğlu is an Assistant Economist at the CBRT.

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There have been strong capital flows from advanced countries to emerging countries as a consequence of increased globalization. Partnerships that increased due to capital flows and/or direct investments caused rapid spillovers of financial shocks from one country or bank to other countries. This development has further increased the importance of external financing factors such as maturity, amount, pricing and distribution of lender countries in terms of risks regarding access to and roll-over of loans. It also underlines the importance of the diversification of lender countries and banks in addition to classical risk management and implementation methods. This blog post presents the findings which suggest that the number of foreign countries and/or banks providing funds to the Turkish banking sector has steadily increased in the recent period and accordingly the weakened sensitivity of external debt to global liquidity conditions has limited the risks related to the concentration of lenders.

The global push factors on the supply side and the borrower country-specific pull factors on the demand side are the main determinants of cross-border bank loans, which are more sensitive to global developments than other types of capital flows. Global risk appetite or uncertainty, funding conditions of banks that play an important role in the allocation and intermediation of global liquidity, monetary and liquidity policies of major central banks, the level of return, and expectations are the main determinants representing the supply side of cross-border bank loan flows. In particular, the severe changes in these financial conditions during and after the global financial crisis caused significant volatility in capital flows to emerging countries, and became a risk factor for financial stability in borrower countries. In this context, the transmission of financial shocks in a certain region of the world to many other countries through financial linkages led borrowing countries to take measures. Several countries including Turkey started implementing a series of macroprudential policies to reduce the volatility stemming from the changes in global liquidity conditions and to support financial stability.[1] The diversification of banking and foreign trade relations across different regions has enabled the Turkish banking sector to gain access to external loans from a broader range of creditors (Chart 1). In the recent period when the amount of external debt has been nearly flat due to demand-driven factors, Turkish banks have obtained and rolled over loans from a higher number of countries/banks. We see that this situation is not limited only to leading banks with larger asset size; relatively small banks also engage in financial relations with a higher number of countries/banks.

Charts 2 and 3 show the change in the shares of lender countries with the highest amount of loans in the total debt of the Turkish banking sector. The surge in the number of lender countries is also reflected in the amount of debt, and the share of major lender countries in total debt has decreased steadily.

Traditionally, the banks headquartered in the Eurozone, the USA and the UK are at the forefront of the global banking network. Yet, the Turkish banking sector’s external borrowing from new regions outside the traditional financial centers has also been increasing in the recent period (Chart 4 and Chart 5).

We conduct an empirical analysis to understand how the increase in the number of countries that provide funds to the Turkish banking sector affects the sensitivity of cross-border bank loans to global liquidity conditions.[2] Our study employs all cross-border borrowing instruments except for bond issuances which appeal to a different group of investors. First, we test the sensitivity of the Turkish banking sector’s cross-border bank loans to global liquidity indicators. We then analyze, using the panel data method, the effects of increased diversification of lender countries/banks on this sensitivity.[3] The estimation results suggest that all the global liquidity indicators individually added to the model have a significant and expected effect on cross-border bank loans. When all indicators are added to the model simultaneously, we find that the VIX index representing the global risk appetite, and global banks’ funding conditions also have a significant and robust effect on cross-border bank loans. At this point, we test whether the increased diversification of lender countries/banks limits this effect. The results indicate that the sensitivity of cross-border bank loans to global liquidity indicators, namely the VIX index, TED spread, Fed policy rate and the US credit conditions, decreases as a result of the increased diversification.

To conclude, in addition to macroprudential policies implemented by policymakers in Turkey recently, the number of countries/banks that provide funds to the Turkish banking sector has also increased steadily, and regions outside the traditional financial centers have also become important sources of funds for the Turkish banking sector. We find that the increased diversification of lender countries/banks lowers the sensitivity of cross-border bank loans to global liquidity conditions and thus limits the risk related to the concentration of lenders. This situation reduces the risk of spillover of financial shocks, which may emerge in any of the lender countries or banks that are systemically important in the allocation and intermediation of global liquidity, to Turkey. Despite the recent problems in Eurozone and UK banks, Turkish banks are not experiencing any problems in rolling over their debt, which should be noted as a proof of reduced sensitivity.[4] These developments offer a positive framework in terms of the banking sector’s funding means and risk management, and support financial stability.

 

[1] In addition to these policies, Cerutti et al. (2014) find that the sensitivity of cross-border bank loans to global liquidity conditions is also determined by many other policies or characteristics peculiar to the borrower country such as exchange rate flexibility, capital controls, the overall institutional environment and the limits on foreign bank presence.

[2] This blog post is based on the Special Topic article “Global Liquidity and Regional Distribution of Cross-Border Bank Loans” published in the CBRT’s Financial Stability Report, Volume: 24. The results of the econometric analysis presented here can also be found in this Special Topic article.

[3] Global liquidity indicators used in this study are the US economy indicators that are prominent in the relevant literature. These are: the VIX index, the TED Spread (3-Month Libor/3-Month US Treasury Bill), the Fed policy rate (deflated with CPI), the slope of the yield curve (10-Year US Treasury Yield Spread/3-Month US Treasury Yield Spread), the US annual growth rate of real private credits, the ratio of US private credits to GDP, US annual growth rate of M2.

[4] The profitability and the stock value of Eurozone-based banks, from which the Turkish banks intensively borrow, dropped dramatically throughout 2016 (Chart 6). In addition, after the Brexit decision, developments in the UK-based banks, which play an important role in the allocation and intermediation of global liquidity, are also closely monitored by international financial markets. At the moment, the Turkish banking sector is not experiencing any problems in rolling over debt from either the Eurozone or the UK banks. The increased diversification of Turkish banks’ external funding across countries and banks in recent years is a favorable development mitigating the risks that may stem from the Eurozone or the UK banking system.

 

Bibliography

Cerutti, E., Claessens, S., & Ratnovski, L. (2014). Global liquidity and drivers of cross-border bank flows (No. 14-69). International Monetary Fund.

Tanju Çapacıoğlu

Tanju Çapacıoğlu is an Assistant Economist at the CBRT.

Note To Editor
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* The views expressed here are those of the authors. They do not necessarily reflect the official views of the Central Bank of the Republic of Turkey.