The Effects of Exchange Rate Protected Deposit System and Foreign Exchange Risk on Loan-to-Deposit Ratio: A Research on the Turkish Banking Sector

Abstract

Purpose – To examine the relationship between the currency-protected deposit system and exchange rate risk on the deposit-to-loan ratio in the Turkish banking sector. Design/Methodology/Approach – The short and long term effects of the exchange rate protected deposit system and foreign exchange risk on the loan-to-deposit ratio in the Turkish banking sector are investigated with the ARDL Bounds Test using 110 weekly observations from the 7th week of 2022 to the 12th week of 2024. Findings – The results of the analysis show that the long term effect of the foreign exchange risk on the loan-to-deposit rate is significant and positive. With the increasing foreign exchange risk, there is an increase in the loan-deposit ratio of the banking sector, which has become more resistant to foreign exchange risk. The long term effect of the exchange rate protected deposit system on the loan-to-deposit ratio is significant and negative. As this ratio increases, the loan-to-deposit ratio decreases. Discussion – Since exchange rate protected deposit accounts are indexed to foreign currency, they can be considered as foreign currency deposits. Foreign currency deposits and liabilities pose foreign exchange risk for the bank, especially in periods of high parity. The analysis results emphasize the need for strategic policy interventions regarding the exchange rate protected deposit system.