The Relationship between Bank Performance and Real Exchange Rates in Turkey: ARDL Boundary Test Approach

Abstract

Purpose-The aim of this research is to econometrically analyze the effects of real effective exchange rates on the performance of the Turkish Banking Sector using monthly data for the period 2012:03-2023:03. Design/methodology/approach - ARDL method was used in the research. In the econometric analysis, two variables, namely Return on Assets (ROA) and Return on Equity (ROE), representing bank performance, and one variable, the real effective exchange rate (EXR) adjusted for inflation effects, representing exchange rates, were used. Short and long-term analysis of the relationship between banking performance and exchange rates was made with the "Bounds Test" approach developed by Pesaran and Shin (1999) and Pesaran (2001). Findings - There is a cointegration relationship between bank performance and real exchange rates in both the long term and short term. Real exchange rates in Turkey positively affect bank performance in the examined period. Discussion - The theoretical expectation regarding the impact of exchange rate volatility on banks' capital returns is that this impact will be negative. However, in this study, the use of real exchange rate variable, not nominal, as the variable representing the exchange rate variable was effective in obtaining such a result. As of the examined period, it has been observed that exchange rates followed a course below the inflation rates and therefore the real effective exchange rate, adjusted for inflation effects, decreased over the years. Therefore, real exchange rates which below inflation rates affected the performance of banks positively rather than negatively.