Leading Indicators of Turkey’s Financial Crises

Abstract

This study empirically observes the leading indicators of 1994, 2000/2001 and 2009 Turkish financial crises. Stepwise regression, Probit and Logit models have been applied to three sets of quarterly data covering the periods of Q1-1990 to Q4-1999 to investigate the leading indicators of the 1994 crisis, from Q3-1996 to Q2-2005 to capture the 2000/2001 twin crises, and from Q3-2005 to Q3-2015 to see the global financial crisis effect on Turkey. Results assert that the three crises of Turkey are different in structure and each has different characteristics with different leading indicators. The results provide a new set of leading indicators that includes capital adequacy and long-term interest rates as well as international variables, and these indicators are compatible with the new structure of Turkish economy. Regulators and policymakers should pay close attention to macroeconomic variables and the banking sector stability of Turkey as well as the status of the global economy as the resultsshow that many banking and international related variables increase the probability of the crisis, this can be through imposing tighter regulations on banks to avoid default and credit risk, following the liquidity levels in the markets and closely following the stability of global economic indicators.