VULNERABILITY ANALYSIS OF TURKISH BANKS USING STRESS TESTING AND INTERNAL CREDIT RATING APPROACH

Abstract

Purpose- This study examines the performance and financial vulnerability of twelve Turkish banks for 2019. Methodology - Stress testing identifies the impact of extreme expected and unexpected shocks to a bank’s capital, provides an assessment of its financial strength to withstand shocks and helps to spot emerging risk(s) and uncover weak spots in the financial institution. It enables banks in identifying their vulnerabilities at an early stage. In addition to stress testing, as for Internal Credit Rating (ICR), some financial ratios have been selected to assess the performance of each bank within banking industry. Findings- All banks in 2019 are within the standard classification of ICR rating except for Şekerbank. However, results show that not all banks are resilient to stress testing implemented in the study. Conclusion- This study shows that Turkish banks are on the knife edge. The results show that the critical factor that may result in the insolvency of the banks is NPLs. Thus, Turkish regulators should take measures that would prevent banks to take any action that would increase their NPLs both in the short and long term.