Macro stress testing on the credit risk of the banking sector in Turkey

Abstract

In our thesis research we conduct a stress test of banking sector in Turkey. Firstly, we develop a model where we regress total and sectoral NPL rates on their lags and macroeconomic indicators. By using the results of the regression we conduct stress tests. As stress test scenarios we use 3 cases. We analyze how the NPL rates of Turkish banking sector would respond to the 2001 and 2008 crisis scenarios and we also look at baseline scenario based on the expectation of OECD on Turkish economy. Based on the results of stress test, not all of the banks in Turkey meet the capital adequacy ratio requirement and under the 2008 crisis scenario total NPL rates rise up to 6.07%. Our sectoral regressions suggest that while our macroeconomic variables are all significant in defining the total NPL rates, some sectoral NPL rates do not necessarily depend on all of them.