Soft Budget Constraints, Government Ownership of Banks and Regulatory Failure: The Political Economy of the Turkish Banking System in the Post-Capital Account Liberalization Era

Abstract

A weakly regulated banking sector is costly notably in the context of emerging-market economies characterized by transitional financial systems. Political and institutional forces play an important role in explaining the inability to implement proper banking sector regulations over significantly time periods. The Turkish experience in the aftermath of capital account liberalization leading to the liquidity crisis of 2000 and 2001 have been utilized as a case study for highlighting the relevance of political and institutional variables in the process of bank regulation. In specific terms, the role that the banking system has played as an avenue for politically generated rent distribution has received primary emphasis. Three major dimensions of the Turkish banking sector in the 1990s have been underlined including the importance of the public banks' duty losses, politicization of new bank entry and the negligible presence of foreign banks. These characteristics are explained by a) the direct involvement of the political authority in the regulatory process; b) the absence of incentives for banks under surveillance to restructure themselves; and c) low priority attached to bank regulation on the part of the regulatory authority in the presence of multiple and conflicting objectives. Finally, attention is drawn to the key role that the external anchors play in facilitating significant regulatory reform.

Market Reaction to Risky Banks: Did Generous Deposit Guarantee Change It?

“…Several studies, such as that of Alper and Onis (2002) emphasize the role of external institutions in promoting banking sector reforms, including the rehabilitation of the deposit insurance system in Turkey. The mismanagement of the priorities of macroeconomic adjustment programs, such as the one designed by the IMF in 1999 prevented the market from being disciplinary toward banks.…”

“…Cizre and Yeldan (2005) pointed out that in Turkey, the first-generation reform phase did not go far enough, because of the involvement of economic bureaucrats and politicians and of their supporters in economic interest groups on banking sector activities. Similarly, Alper and Onis (2002) argued that ''. .…”

“…In addition to the weak implementation of the regulations, for various reasons (including political interventions until 1999), the IMF's new structural reform program ignored the fragility of the financial markets and institutions and caused further loss of confidence in the banking sector. In particular, due to the IMF's design failure, the Central Bank's ability to implement implicit mechanisms such as ''lender of last resort'' in addition to the fiscal authorities' use of their traditional tools of austerity made the economy powerless against speculative attacks (see Akyuz & Boratav, 2003;Alper & Onis, 2002;Cizre & Yeldan, 2005). Considering all, in this paper, we argue that in quite a lax regulatory environment, the marketdepositors and borrowers-might have an incentive to protect their stakes from various risks in the banking system.…”

Emerging Market Crises and the IMF: Rethinking the Role of the IMF in Light of Turkey's 2000–2001 Financial Crisis

“…The evolution of financial sector regulation in the post 1989 era in Turkey is extensively investigated in Alper and Onis (2002).…”

“…In retrospect, the severe information problem manifested itself in the Fund's under-estimation of the scale of the duty losses of the public banks and the problem of financing these losses in the inter-bank market. For an elaboration of this issue, see Alper and Onis (2002).…”