The impact of earthquake in Istanbul on the capital adeqacy ratio of the banks

Abstract

The purpose of this study is to directly examine the effects of the expected Marmara earthquake, which may cause a huge financial shock in terms of non-performing loans and failure of collaterals on the Capital Adequacy Ratios (CAR) of the banks. In this direction, considering the real estate collaterals, what level of risk exposure banks will face on their CAR is examined and whether the earthquake has a significant effect on CARs. In this respect, the study consists of five parts. In the first part, information is given about the historical process of the Basel agreement and the capital adequacy ratio and theoretical determinations about the subject. In the second part, various studies in the related literature are summarized. In the third part, the analysis methods (how and from where the data was retrieved and used in the analysis) of the relevant data are explained. In the fourth part, the findings of the analysis are discussed, and the last part consists of a general evaluation. As a result of those shocks, retail and corporate loans and mortgage loans are subject to risk arising from the failure of the collaterals because of the earthquake. CAR of the banks may decrease dramatically, based on the proportion of those risk classes in banks’ capital adequacy structure. Although banks are affected due to the shocks, all can preserve their CAR over the regulatory limit of %8.