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Dollarization and bank performance

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2019
Işık, Sena
Dollarization is an important topic in the developing economies since 1970s. It has significant effects on the real sector, public debt management, monetary policy and financial system. In addition, denomination of a big portion of the financial assets and liabilities in foreign currencies creates mismatch between the currencies of assets and liabilities held in foreign currencies and those in domestic currency. The currency mismatch causes financial fragilities and subsequent serious macroeconomic risks. The banks, which burden these risks by accepting foreign exchange deposits and extending foreign exchange credits while functioning as an agent between depositors and creditors, could experience various impacts of dollarization on their performances. In this study, the impacts of dollarization on banks’ performance in Turkey for the period of 2012-2017 are investigated. Both static and dynamic panel data analyses are conducted for this aim. Fixed Effect Regression, Random Effect Regression and GMM aproaches are employed for the estimations. The GMM results indicate statistically significance of negative impact of deposit dollarization on ROA; however, the static panel data analyses results show that the negative effect of deposit dollarization on ROA is statistically insignificant. On the other hand, both the random effect regression and GMM results show a statistically significant and negative relationship between ROE and deposit dollarization. On the credit dollarization side, random effect regression results indicate a significant and negative impact of credit dollarization only on ROA. According to the GMM results, the effect of credit dollarization on bank performance is not found statistically significant.