Financial development and stability in a “belt & road” economy : evidence from ICBC Turkey

Abstract

The banking sector constitutes a major part of the Turkish financial system. Turkish financial system has some constructional problems such as dollarization, Lira depreciation, low saving rate, etc. However, Turkish financial system also shows kind of resilience and recovers from external shocks time to time. To under the micro base or driven factor of Turkish financial system, this thesis focus on depositors’ behavior during currency shock based on data of a commercial bank in Turkey, ICBC Turkey. I find that depositor responses to a currency shock vary depending on political views. Triggered by a combination of unorthodox economic policies and geopolitical conflict with the U.S., the Turkish lira against the U.S. dollar depreciated 14% on August 10, 2018. Using unique depositor-level micro data from a Turkish bank, I find that households significantly increase their foreign currency deposits after the currency shock, and the shift to FX is most pronounced in areas with low support for president Erdogan, while people in areas with high support are significantly less likely to move from lira to FX. These shifts to FX persist long after the shock, despite the lira regaining much of its lost value. I also find evidence that the shift to FX is correlated locally within branch, suggesting that social interactions play a role, and that this effect increases after the currency shock. The change in depositor currency preferences is associated with an increase in foreign-currency loans and increasing currency mismatches on Turkish banks’ balance sheets, which translate into differences in bank profitability.