The goal of this paper is to understand the effect of macroeconomic conditions on performance in Turkish banking. Turkey has experienced a series of financial distresses in the past three decades. This has served as a “negative externality” on banking performance despite important improvements in managerial performance during the period. This study is to show the relative magnitude of internal (managerial) and external (macroeconomic) factors on the survival performance of Turkish banks. By using 30-year data, and employing a non-parametric approach, we calculate the various productive performance indicators such as technical, managerial, scale, allocative and cost efficiencies of the Turkish commercial banks for the period 1970-2000. In order to investigate the causes of bank survival performance, we develop six probit early-warning regression models using efficiency as a proxy for management quality along with macroeconomic factors such as liquidity. Adding the efficiency measures (managerial factors) increases the classification accuracy of our early-warning model, and cost efficiency proves to be the best among the other efficiency measures in terms of increasing the classification accuracy. Also, illiquidity caused mainly by macroeconomic conditions is found to be the major cause of bank failures and successes in Turkey, indicating heavy burden from policy mistakes on banking performance.
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