Do financial reforms always improve banks efficiency and competition? A long-term analysis of Turkey’s experience

Financial policy changes are aimed at improving banks efficiency and competition; however their effectiveness in the context of emerging economies is far from obvious. Using Turkey as a case study, we create a unique data set and analyse the impact of almost 30 years of financial policy changes on the cost efficiency and competitiveness of its banks. We estimate a stochastic cost frontier with inefficiency determinants, then rely on two complementary approaches for the measurement of competition: a novel implementation of the Boone model, and the Persistency of Profits (POP) model. We find that deregulation does not bring the expected benefits, and performance starts improving only after the introduction of prudential re-regulation policies. The entry of foreign banks helps technological progress, competition and efficiency improvements, and all banks eventually reach similar efficiency levels.