The impact of market risk on financial performance of banks in Türkiye: A comparative panel data analysis

Abstract

This study investigates the relationship between the selected determinants of market risk and the financial performance of banks in Türkiye. Secondary data is used for eight participation and conventional banks from the year 2010 to 2019. The market risk determinants are interest rate (INT), the exchange rate (FX), inflation rate (INFL), and gross domestic product (GDP) per capita. The financial performance determinants for both participation and conventional banks are return on assets (ROA) and return on equity (ROE). Panel data tests are utilized including the Augmented Dickey–Fuller unit-root test, Johansen cointegration test, and Granger causality test employing the EViews program. The findings of this study indicate that INT, FX, INFL, and GDP per capita have a highly significant positive long-run impact on ROA and ROE for both participation and conventional banks in Türkiye. However, the level of significance is lower for conventional banks. In the short-term analysis, both groups of banks seem to be affected by market risk variables. However, the analysis indicates that the level of insignificance appears to be less for conventional banks compared to participation banks, with a positive effect shown for conventional banks compared to participation banks in the long run. Participation banks should enact policies to diminish the effect of market risk and adopt a diversity of financial contacts in their financial activity in order to not be affected by market risks variable in particular the fluctuations in interest rate and inflation.