Abstract
The last two decades characterized by financial crisis episodes have seen a proliferation of empirical studies. These early warning system models allowed researchers to distinguish certain key determinants of financial crises, and helped predicting and preventing the occurrence of some crises. However, crises continue to arise as recently illustrated by the onset of the global financial crisis. This clarifies that there are still a lot to learn about financial crises. In this sense, this paper aimed to compare the performance of several currency and banking crisis indicators within the Turkish economy which underwent severe financial crises in the last twenty years. Different currency crisis indicators performed well by detecting the 1994, 2001 and 2008 currency crises, while banking crisis indicators had significant inconsistencies. However, two banking crisis indicators we developed stand for valuable efforts in dating banking crises by constructing aggregate indexes, and contribute significantly to the empirical crisis literature.
TopIntroduction
After relative stability in the post-World War II period, the world economy became once again familiar with recurrent crisis episodes following the collapse of the Bretton Woods system in 1971. After the Latin American economies in the early 1980s, financial crises hit some European countries in 1992-1993, Mexico in 1994, South-East Asia in 1997-1998, Russia in 1998, Brazil in 1999, and Argentina in 2001. Besides, the last global financial crisis has been affecting the world economy since late 2008. This global economic and financial instability also touched Turkey which underwent severe financial crises in his recent economic history.
These repeated crisis episodes that caused high economic and social costs for the public sector as well as for private investors stimulated a large discussion on the theoretical specification of crisis models and the empirical analyses that aim at identifying crisis determinants in order to predict future crisis episodes. In this regard, these empirical studies are frequently called early warning systems (EWS), as they are likely to inform policymakers and investors about the occurrence of a crisis in the near future. The EWS models use fundamental economic and financial determinants as predictor variables and various statistic and econometric techniques.1 Whatever the techniques and the set of variables used to generate EWS forecasts, identifying crisis episodes plays a key role, since these identified crisis episodes by crisis indicators enter into EWS models as dependent variables.
In this paper, we aim to construct different currency and banking crises indicators for the Turkish economy, which suffered several financial crises through the last three decades, and to assess the performance of these indicators in identifying the Turkish crisis episodes. In this sense, this paper has some common points with the study of Lestano and Jacobs (2004, 2007) and Perez (2005). To the best of our knowledge, Ari (2010, 2012) are the only papers that compare the performance of different currency crisis indicators for the Turkish economy. However, this paper goes beyond Ari (2010, 2012) as it also assesses the performance of banking crisis indicators. Furthermore, this study covers the entire post-liberalization era (1990-2014) by using monthly data gathered from the International Financial Statistics (IFS) of the IMF and the Central Bank of Republic of Turkey (CBRT).
Key Terms in this Chapter
Bank Run: A generalized and massive withdrawal of deposits from a financial institution at the same time, as depositors believe that the financial institution is, or might become, insolvent.
Speculative Attack: Massive selling or exchange of domestic currency-based assets by foreign currency by both domestic and foreign investors.
Bailout: Necessary financial support given to a company or country which faces serious financial difficulty or bankruptcy, by national monetary authorities and/or international organizations.
Moral Hazard: The fact that one person or institution takes excessive risks because someone else bears the burden of those risks. Moral hazard generally occurs under the asymmetric information framework.
Systemic Risk: The risk of collapse of an entire financial system or entire market imposed by interlinkages and interdependencies in a system, where the failure of a single entity or cluster of entities can cause a cascading failure, which could potentially bankrupt or bring down the entire system or market.
Lending Boom: Excessive bank lending to private sector due to easy credit conditions characterized by low interest rates which results in asset prices rising. Most bad loans are made through this aggressive type of lending which naturally increases the probability of banking crises.
Deposit Insurance: A measure implemented by the government or particularly the Savings Deposit Insurance Fund to protect bank depositors, in full or in part, from losses caused by a bank’s inability to pay its debts when due.