Abstract/Summary

This article examines financial dollarization in Turkish banking sector during the 2002 Q4–2018 Q4 period. We find significant currency mismatch in banks’ balance sheets: banks happen to transfer less than 30% of their foreign denominated deposits into foreign denominated credit. In addition, banks with greater currency imbalance are more likely to extend their domestic denominated currency loans. Although raising funds in foreign currency to lend in domestic currency can help banks increase their profits, this also increases banks’ exposure to exchange rate risks. Further examination shows that banks continue facing great currency risk despite hedging through off-balance transactions.