Ensar Yilmaz

Deposit insurance and moral hazard problem: the case of Turkish banking system

We investigate the effect of full deposit insurance introduced in 1994 on the financial performance of Turkish commercial banks. We construct a model, under reasonable assumptions, with deposit insurance where banks undertake excessive risk  – moral hazard risk. Empirical investigation using experimental design approach supports our moral hazard hypothesis. Our findings indicate that banks subject to the moral hazard behaviour show significant increases in foreign exchange position risk and deterioration in capital adequacy relative to their benchmark after introduction of full deposit insurance system. We relate this excessive risk-taking to the moral hazard behaviour by commercial banks. The research results indicate that complete deposit insurance system distorts the incentive structure of commercial banks and thus, prevents proper functioning of market discipline mechanism and leads to the taking excessive risk-taking.

The Exchange Rate: A Shock Absorber or Source of Shocks in Turkey?

This study investigates the role of the exchange rate as shock-absorber as opposed to a source of its own shocks in Turkey during the period from 1990 to 2009 by employing a structural VAR framework with long-run and short-run restrictions. We find that the economic shocks have predominantly been asymmetric relative to one of the largest trading partner, the US. Our results provide evidence of the fact that while the major source of variability in exchange rates in the pre-2001 crisis period is mainly nominal shocks, a large proportion of the exchange rate variability can be attributed to supply and demand shocks in the post-2001 crisis period. This suggets that, rather than reacting to shocks to the foreign exchange market, such as shifts in risk premia, the exchange rate moves mainly in response to the real shocks during the post-2001 crisis period. Hence, there is a sizeable role for exchange rate stabilization during this period, absorbing those shocks and therefore requiring opposed monetary policy responses.

Resources versus Capabilities in Social Justice

Over the last decades, economists, political theorists and philosophers have debated the question of what the proper metric of justice is. In other words, they have sought to answer the questions what should we look at, when evaluating whether one state of affairs is more or less just than another? Should we evaluate the distribution of happiness? Or wealth? Or some combination of these and other factors? The resourcist approach and the capability approach as egalitarian theories of social justice are two prominent answers to these questions. While the former approach has been developed by the studies of John Rawls and Donald Dworkin, the latter approach has been associated with the studies of Amartya Sen and Martha Nussbaum. A fundamental debate between these approaches continues over what should be distributed. This paper attempts to bridge the gap between these approaches. By this we aim to bring their different perspectives together to reconsider the relationship between resource and the capability approach, and to open up a new insight to understand both approaches as complementary theories, rather than purely rival theories of justice. JEL: D30, D63

Capital regulation and auditing

The experience from banking crises in several countries over the last few decades has made regulators, supervisory authorities, banks themselves, as well as probably their shareholders, more aware of the importance of capital regulation. In addition to these developments, the 1988 Basel Capital Accord (Basel I) and the new proposals from the Basel Committee on Banking Supervision (Basel II) have focused on minimum capital requirements and supervision requirements. Basel II has focused primarily on setting the capital requirements, commonly referred to as Pillar One. However, good capital requirements mean little if they cannot be enforced. For this reason, more attention needs to be focused on Pillar Two, that is, supervisory review. Supervisory review is fundamental to the success of capital regulation. In accordance with the main concerns of Basel II, in this paper we discuss both capital regulation and auditing policies in our model. Traditional approaches to bank regulation emphasize the positive features of capital adequacy requirements. They argue that capital, or net worth, serves as a buffer against losses and failure. Along with deposit insurance, official capital adequacy regulations play a crucial role in aligning the incentives of bank owners with depositors and other creditors (e.g., Furlong and Keeley (1989), Keeley and Furlong (1990), Kaufman (1991), and Berger and Udell (1994)). Hence, it is often advised that the riskier a bank’s assets, the more capital it should hold. However, some researchers disagree over whether the imposition of capital requirements actually reduces risktaking incentives for various reasons (e.g., Kahane (1977), Kim and Santomero (1988) and Besanko and Kanatas (1996)). On the other hand, numerous scholars (inter alia Baron (1984), Baron and Besanko (1984), Demski et al. (1987), and Kofman and Lawarree (1993)) have shown that auditing a contract plays an important role in mitigating incentive problems. Most of these studies assume that the principal commits to an auditing policy—announced probability of an audit. However, commitment to auditing suffers from a time-consistency problem. Thus, if the firm being audited never cheats, the audit never reveals any cheating and there are no ex post incentives to audit. Therefore, because of the time-inconsistency problem of the commitment strategy, the no-commitment strategy 2012 iStockphoto LP