State Ownership and Bank Lending : Evidence from Turkish Banking Industry

We aim to analyze how the cyclical patterns in state bank lending behavior diverge from other bank types throughout economic downturns. Exploiting the exogenous shock that occurred during the Global Financial Crisis, we use high-frequency spatial banking data belonging to a large emerging economy, Turkey. The difference-in-differences estimations for the interval 2007Q4-2011Q4 indicate that state banks sustain less procyclical lending growth relative to domestic private and foreign banks. State bank lending is efficient based on lower credit risk and wider credit allocation across a spectrum of consumer and commercial loan categories. Provincial data also show that the differential state bank lending highlights the mitigating role to alleviate market failures around the crisis period, while the political motives are not influential determinants. Our main findings are invariant to a myriad of robustness diagnostics as well as an external validity check incorporating the recent Covid-19 outbreak. Overall, our results highlight the importance of state banks for policymakers as a toolkit to ensure the continuity of credit supply under financial turmoil