Journal of Risk

The impacts of financial and macroeconomic factors on financial stability in emerging countries: evidence from Turkey’s nonperforming loans

Mustafa Tevfik Kartal, Fatih Ayhan and Merve Altaylar

  • This study examines impacts of financial and macroeconomic indicators on financial stability, focussing on Turkey in the period 2005 Q1 to 2020 Q3.
  • The RALS unit root test and generalized method of moments approach are applied.
  • Financial variables are found to have a higher impact on NPLS than macroeconomic variables.
  • The COVID-19 pandemic is demonstrated to have an increasing impact on NPLs.

This study examines the impacts of financial and macroeconomic factors on financial stability in emerging countries by focusing on Turkey’s banking sector. In this context, financial stability is represented by nonperforming loans (NPLs). Four financial and three macroeconomic indicators as well as the Covid-19 pandemic are included as explanatory variables. Quarterly data from 2005 Q1 to 2020 Q3 are analyzed by using the residual augmented least squares unit root test and generalized method-ofmoments. The empirical results show the following: credit volume, which is a financial indicator, has the greatest effect on NPLs; risk-weighted assets, unemployment rate, foreign exchange rate and economic growth all have a statistically significant impact on NPLs; the Covid-19 pandemic has had an increasing impact on NPLs; inflation and interest rates have a positive coefficient, as expected, although they are not statistically significant. These results highlight the importance of financial factors (ie, credit volume and risk-weighted assets) over macroeconomic factors in terms of NPLs. Based on the empirical results of the study, we suggest Turkish policy makers focus primarily on financial variables (ie, credit growth and risk-weighted assets) as well as considering the effects of other factors.

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