Interest revenue allocation of bank stakeholders before and after the 2008 financial crisis: A study on Turkish banks

The purpose of this study is to analyze banks by focusing on interest payments between the banks and their major stakeholders, and to examine whether the recent financial crisis and following regulatory changes have impacted the distribution of interest flows among the debtors, creditors, and the banks, and in turn, bank shareholders.

Primarily, banks’ net interest margin (NIM) from intermediation constituting the main component of shareholder returns is analyzed. Secondly, the relative share of stakeholders in interest flows before and after the recent financial crisis, measured by the ratio of depositor interest returns to the banks’ total interest revenue (split ratio), is analyzed.

A higher split ratio points to lower bank spreads, and so to a more efficient intermediation of funds directly bearing upon households and businesses. The debtors pay less interest in cover of the bank spreads, and the depositors get a higher portion of banks' interest revenues at the expense of the shareholders. Therefore, a too high interest split ratio may penalize shareholders to hinder banks’ capital raising capacity. A higher interest split ratio may also indicate a lower credit and liquidity risk environment for banks.

Generalized method of moments (GMM) methodology is used for examining simultaneously the NIM as well as the interest split model. The NIM model is developed based on the previous studies on NIM by Nguyen (2012), Valverde and Fernandez (2007) and others. We use a sample of publicly trading Turkish deposit banks obtained from the Bloomberg database, between Q3:2002 and Q1:2016. We employ the following factors in our model: liquidity risk, market risk, credit risk, operational expenses, fee income, market structure and economic growth.

The preliminary results show that all the variables for the NIM model are highly significant, the signs are as expected, and the NIM of Turkish banks are higher before the global financial crisis period. In the second regression, we analyze the interest split ratio using the same variables and find that most of these variables are highly significant. The preliminary results show that the interest split ratio is lower before the crisis and higher afterwards. It can be concluded that shareholders were not only enjoying higher margins before the crisis, but also enjoying a higher portion of interest revenues at the expense of deposit holders.