Risks Hidden by Inflation: The Real Situation in the Financial Structure of Banks

Abstract

Purpose-The aim of this study is to highlight the key differences in the financial structures of banks that arise due to high inflation by demonstrating the results of inflation adjustments to market participants. This, in turn, aims to provide a perspective for stakeholders in their managerial and financial decision-making processes. Design/methodology/approach –In the study, inflation accounting practices were applied to the financial statements of seven large-scale banks operating in Turkey, and a comparison was made between the inflation-adjusted financial statements and the current financial statements. The General Price Level Accounting Method was used for the inflation adjustment, and the monetary gains/losses on balance sheet items were calculated based on the net monetary position movements method. Findings - The calculations revealed that, in the absence of inflation adjustment, fictitious profit figures appear in the financial statements of banks, which misleadingly affects critical financial ratios such as return on equity and liquidity. Specifically, the direct association of banks' core activities with equity from a legal perspective necessitates the timely identification of risks concealed by inflation and the adoption of appropriate measures. Discussion –Although there are studies on inflation accounting in the literature, the lack of recent applications is noteworthy. This study is a current research that examines the effects of inflation accounting on the banking sector and aims to fill the existing gap in the literature while providing insights to relevant stakeholders based on the findings obtained.