Foreign exchange rate shocks and stabilizing role of interbank markets: evidence from Turkey

ABSTRACT

We study the transmission of exchange rate shocks in the Turkish interbank loan market using high-frequency bank-level data. Our results suggest that interbank market plays a stabilizing role: following large domestic currency depreciations, banks with a higher share of foreign currency liabilities borrow more in the interbank market, with a higher but insignificant effect on borrowing costs. The results are stronger the larger the exchange rate shock is and the lower the capital adequacy or liquidity ratios of borrower banks. Interbank markets play a weaker stabilizing role for banks with higher short-term rollover risks.

KEYWORDS:

• Interbank market
• exchange rate
• financial stability
• balance sheets

JEL CLASSIFICATION:

• F31
• G20
• G21

Disclosure statement

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

Notes

¹ The results are strongly robust to using return on assets to capture banks’ profitability.

² For the regressions using Sample (2), we define the dependent variable for volume as log(1+ volume). We exclude borrower-lender bank pairs from Sample (2) for which less than 10 transactions occurred during the whole sample period.

³ The results are by and large robust to including lender bank controls and excluding lender-day FEs (Table A2). Banks with higher FX liabilities ratio borrow more in interbank markets following large currency depreciation shocks (with insignificant effects on borrowing rates). As found above, the evidence is weaker for banks with short-term rollover risks. In fact, such banks seem to borrow less, potentially leaving them to delever.