Predicting Financial Failure of the Turkish Banks

Abstract

Banks are the most important financial institutions in Turkey because other financial institutions are not developed efficiently yet. Turkish banks experienced financial difficulties and a substantial amount of banks failed in the past. This event urged the government to initiate measures to prevent banks from getting into financial difficulties. As a result of these measures, Turkish banking system currently seems to be very attractive for the foreign investors willing to invest in this sector. One of the main concerns of the foreign investors is a possibility of a new banking crisis although it is very remote at this time. The purpose of this study is to develop early warning systems predicting the financial failure at least three years ahead of financial date. A number of multivariate statistical models such as multiple regression, discriminant analysis, logit, probit are used. We found that the most appropriate model is logit. The significant variables obtained from the models explain very well the causes of the bank failures. Our models can be used to assist interested parties to predict the probability of financial failure of Turkish banks.