The Procyclicality of the Leverage Ratio in Turkish Banking Sector

Abstract

The leverage ratio is an important ratio, especially in the banking sector. In this study, it is researched whether the leverage ratio in Turkish banking sector is influenced from the procyclicality in the Turkish economy or how it is influenced. For this purpose, it is focused on leverage ratio and asset rate. As leverage ratio, it is used the external assets / total shareholder’s equity rate and also the total assets / total shareholder’s equity. As indicator for asset quality and change is used the total loans / total assets in Turkish banking sector. The relationship between the leverage ratios and the total loans / total asset rate in the condition of the all else being equal is analysed empirically as a whole with the quarterly banking cumulative sectorial data between 2007 - 2019 by ARDL ( Auto-Regresive Distributed Lag ) method for first time. According to the analysis results, there is a positive and statistically significant relationship between each of the leverage ratios and the total loans / total assets rate in the long run. It indicates that the leverage ratio is procyclical. It means that the leverage ratio increase and also the total loans / total assets rate in banking sector increase. To conclude, as the credit policy, it is recommended to determine countercyclical policy during financial expansion periods for the financial stability.