Financial Distress and Bank Performance: Turkish Experience

Turkey experienced a severe financial crisis in 1994 that resulted in a record level economic contraction and a large number of failures among industrial and financial firms. Employing a nonparametric approach, we measured the efficiency and productivity of the Turkish banking sector between 1992 and 1996. We also decomposed the productivity growth into its mutually exclusive and exhaustive components (technological change and efficiency change) to understand the impact of the crisis on different aspects of bank productivity. Our results suggest that there was a substantial productivity loss (17%) in 1994, which was mainly attributable to technological regress (10%) rather than efficiency decrease (7%). We also examined the effect of the crisis on different groups of banks operating in Turkey. We found that foreign banks suffered the most from the crisis, followed by private banks. Further, public banks apparently passed through the crisis practically unharmed. Public banks’ relative immunity could be explained with their respectively low open positions in foreign exchange in the advent of the crisis and with their relative soundness and safety in the event of the crisis. We also explored the relationship between bank size, productivity and crisis. Our results indicate that even though the crisis affected all sizes of banks dramatically, its adverse impact on small banks was overwhelming. However, measures undertaken by the government and banks’ own efforts seem to have helped the financial sector recover and attain its pre-crisis productivity and efficiency levels within the following two years.