The Effect of Financial Instability on the Stability of Public Banks: A PMG/ARDL Panel Approach

This paper aims to analyse the impact of some macro-financial instability variables specific to the Turkish economy on the financial stability performance of state-owned banks. The study utilises quarterly data for the period 2017-2022. The panel, PMG/ARDL technique, is used as the econometric model to achieve the study's cointegration of long-run and short-run empirical objectives. The findings of this study conducted in an emerging economy indicate a significant cointegration between the financial instability indicators in the model and the financial stability of banks. In the PMG impact analysis, it is observed that the indicators of total domestic loan volume, credit risk premium and nonperforming loan ratio reduce the stability of banksin the long run, while banks can successfully manage this situation by turning it into a positive in the short run. Finally, there is statistically significant evidence that the indicators that cause instability have a negative impact and a cointegrated relationship in the long run on the financial stability of banks, which play an important function in the economic system for both the real and financial services sectors. In this context, the evidence of the banking sector's stability has implications for policymakers, academia, regulators and investors in the banking sector.