Predicting Financial Crises in a Globalized World: The Case of the Turkish Banking Sector

Predicting Financial Crises in a Globalized World: The Case of the Turkish Banking Sector

Asli Yuksel Mermod (Marmara University, Turkey), Ülkü Yüksel (The University of Sydney, Australia) and Catherine Sutton-Brady (The University of Sydney, Australia)
DOI: 10.4018/978-1-5225-3767-0.ch004

Abstract

This chapter highlights the facts about financial crises and their fundamental causes on specific incidents, including the 1929 Great Depression that lasted until the early-1940s, 1997 Asian Financial Crises, 1998 Russian Financial Crises, and the Liquidity Crises of 2008, and makes a comparison among them and their various outcomes. In doing so, the study specifies the cues that emerge in the financial system that may help governments predict upcoming financial crises through those early warning signals. This case study specifically analyses the Turkish Banking System that was restructured after the enormous financial crises in Turkey in 2001, which caused many Turkish banks to collapse. However, the precautions taken in the aftermath of the financial turmoil allowed them to survive the liquidity crises in 2008. The indicators of an upcoming crisis are examined, the lessons learned from this case are analyzed, and important recommendations to overcome banking crises are provided.
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Globalization And Financial Crises

Globalization is accepted as a process that removes geographical boundaries and enables the economic integration and interdependence of national economies into the international economy through trade, foreign direct investments, capital flows and migration. Globalization initiates the widening of international trade, transformation of financial sources, increasing foreign investment and joint enterprises, generating interdependency. Today, countries become dependent on each other economically due to technological advancement, digitalization, and easy and fast communication. Since the1990s, financial globalization removed boundaries, opened up financial markets to international competition, and increased international capital flows. Yet, the increase in the short-term capital movements as an inevitable result of globalization increased the volumes of financial crises.

Economic crises are unexpected, powerful, and sudden events that can have serious implications, which may arise with consequences, seriously affecting s country’s’ macro economy and the firms in the micro economy (Aktan & Huseyin, 2001). The United Kingdom’s Department for Business, Enterprise and Regulatory Reform (2008) describes a crisis as “an abnormal situation, or even perception, which is beyond the scope of everyday business, and which threatens the operation, safety, and reputation of an organization.” A crisis is a major, unpredictable event that threatens an organization and its stakeholders. Although crises are unpredictable, they are not unexpected.

Crises can affect businesses, educational institutions, families, non-profits, the governments, religious institutions, and are caused by a wide range of reasons. Crises can be separated into two according to their impact: real sector crises and financial sector crises. While the former impacts on production or employment, the latter, financial crises, are major distractions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and non-financial firms (Mishkin, 2015).

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