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Do financial reforms always improve banks efficiency and competition? A long-term analysis of Turkey’s experience

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Abstract

Financial policy changes are aimed at improving banks efficiency and competition; however, their effectiveness in the context of emerging economies is far from obvious. Using Turkey as a case study, we create a unique data set and analyse the impact of almost 30 years of financial policy changes on the cost efficiency and competitiveness of its banks. We estimate a stochastic cost frontier with inefficiency determinants and then rely on two complementary approaches for the measurement of competition: a novel implementation of the Boone model, and the Persistency of Profit (POP) model. We find that deregulation does not bring the expected benefits, and performance starts improving only after the introduction of prudential re-regulation policies. The entry of foreign banks helps technological progress, competition and efficiency improvements, and all banks eventually reach similar efficiency levels.

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Notes

  1. The data set could not be extended beyond 2016. See Sect. 3.2 for more details.

  2. As discussed later, Turkish banks had very high levels of NPLs over the period, stabilising only in the mid-2010s to around 4 per cent of total loans. Ignoring them in the empirical analysis would be problematic.

  3. For recent analyses of the effects of regulatory reforms, see, e.g. Barth et al. [19] Casu et al. [4] and Hamdaoui and Maktouf [6].

  4. A good overview of frontier models can be found in Kumbhakar et al. [44].

  5. Details on the construction of this variable are offered in the Appendix.

  6. We could not separate the price of labour from other operating expenses due to data limitations brought about by the changes in accounting rules. More details are provided in the Appendix.

  7. As discussed in "Overview of Turkey’s reform and related literature" section, the whole banking reform programme can be divided into two phases. The initial phase focuses on structural deregulation aiming at stimulating competition; the latter phase focuses on strengthening banking stability.

  8. For a review of the literature and a critical comparison of the models therein see, among others, Leon [56] and Shaffer and Spierdijk [57].

  9. It is worth bearing in mind that efficiency scores are not absolute but relative to the sample. This is the reason why it is not unusual to estimate high levels of efficiency in single country analyses.

  10. These results are not reported here but are available from the authors upon request.

  11. Once again recall that values are relative and not absolute, and banks are compared with one another given the sample and their application of technology.

  12. For ease of comparison, we multiply the Boone coefficients of marginal costs times -1, so that a higher positive value indicates in both cases an increase in competition.

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Authors and Affiliations

  1. Department of Economics, University of Reading, Reading, RG66AA, UK

    Nuri Altintas

  2. School of Business and Economics, University of Loughborough, Loughborough, LE11 3TU, UK

    Alessandra Ferrari

  3. Essex Business School, University of Essex, Colchester, CO4 3SQ, UK

    Claudia Girardone

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  1. Nuri Altintas
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  2. Alessandra Ferrari
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Correspondence to Alessandra Ferrari.

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Appendix

Appendix

See Table 5.

Table 5 Variables definition
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This table reports the definitions of the main variables in Eq. (2). Accounting rules in Turkey were changed in 2002, along with the re-regulation process. This led to the reclassification of several items, mainly but not exclusively from the income statement. A great deal of care had to be exercised since the same headings had often a different meaning before and after the change. In this table, we provide details on how we constructed the variables of our data set. The data are obtained from the Banks Association of Turkey (BAT) database (Data Query System) and from its annual periodicals (Banks in Turkey). Data are deflated using 1998 as the base year.

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Altintas, N., Ferrari, A. & Girardone, C. Do financial reforms always improve banks efficiency and competition? A long-term analysis of Turkey’s experience. J Bank Regul 23, 458–469 (2022). https://doi.org/10.1057/s41261-021-00182-0

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