Macro Stress Testing the Credit Risk of Conventional and Participation Banks in Turkey: A Nonparametric Quantile Regression Approach

ABSTRACT

This paper applies a novel time series-based additive nonparametric quantile regression technique to stress test the credit risk of conventional and participation banks in Turkey. We particularly examine the effects of the exchange rate, unemployment rate, the policy interest rate, and the public debt-to-GDP ratio on the non-performing loan ratio (NPL) of Turkish banks at distinct quantile levels. We find that their effects are heterogeneous and significantly vary across different types of banks and quantiles. Overall, participation banks are more vulnerable to negative scenarios associated with the exchange rate, unemployment rate, and public debt ratio than conventional banks.

KEYWORDS:

• Macro stress resting
• non-performing loans
• nonparametric quantile regression
• participation banking
• scenario analysis
• Turkish banks

JEL Classification:

• C14
• C32
• G21

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work was supported by the Türkiye Bilimsel ve Teknolojik Araştırma Kurumu [218K241].

Notes on contributors

Resul Aydemir

Resul Aydemir is an Associate Professor in the Department of Economics at Istanbul Technical University. Dr. Aydemir’s fields of specialization are banking and finance, industrial organization and airline industry. His work has received funding from the TUBITAK and has been published in economics journals such as Journal of International Financial Markets, Institutions and Money, Economic Systems, Journal of Air Transport Management, Economic Research, Emerging Markets Finance and Trade, Eurasian Economic Review among others. He received a B.S. in Mathematics and an M.S. in Economics from the Bogazici University and an M.S. and a Ph.D. in Economics from the University of Texas at Austin.

Zehra Atik

Zehra Atik is a PhD student and a research assistant in the Department of Economics at Istanbul Technical University. She received her B.A. in economics from Istanbul University and MS in economics from Galatasaray University. She has worked as a researcher in various projects funded by the TUBITAK.

Bulent Guloglu

Bulent Guloglu is a Professor in the Department of Economics at Istanbul Technical University, Turkey. He received his Ph.D. and Master’s degrees from the University of Paris in 2000 and in 1995, respectively. He worked as a visiting professor at Illinois at Urbana Champaign between 2012-2013. His research focuses on time-series and panel data econometrics. His works have been published in Journal of International Financial Markets, Institutions and Money, Economic Modeling, Emerging Markets Finance and Trade, Economic Letters, Applied Economic Letters, Defense and Peace Economics among others. He has conducted various projects funded by the TUBITAK.