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Abstract:
A weakly regulated banking sector is costly
notably in the context of emerging-market economies
characterized by transitional financial systems. Political and
institutional forces play an important role in explaining the
inability to implement proper banking sector regulations over
significantly time periods. The Turkish experience in the
aftermath of capital account liberalization leading to the
liquidity crisis of 2000 and 2001 have been utilized as a case
study for highlighting the relevance of political and
institutional variables in the process of bank regulation. In
specific terms, the role that the banking system has played as
an avenue for politically generated rent distribution has
received primary emphasis. Three major dimensions of the Turkish
banking sector in the 1990s have been underlined including the
importance of the public banks' duty losses, politicization of
new bank entry and the negligible presence of foreign banks.
These characteristics are explained by a) the direct involvement
of the political authority in the regulatory process; b) the
absence of incentives for banks under surveillance to
restructure themselves; and c) low priority attached to bank
regulation on the part of the regulatory authority in the
presence of multiple and conflicting objectives. Finally,
attention is drawn to the key role that the external anchors
play in facilitating significant regulatory reform.
JEL
Classifications: F21,
G21, O19
Keywords:
Liquidity Crisis, State Reform, Public Banks, Rent
Distribution, External Anchor
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