Despite the observation that the role of commercial banks in market-oriented economies is shrinking, it is an undeniable fact
that they retain a pivotal role in financial markets. However, when we investigate the structure of banking systems across different
countries, we find substantial differences. State-owned banks may be misused by the governing party, who may direct state
banks to channel funds to projects which will benefit those that support the government rather than those which serve the greater
public interest. Consequently, the actions of state-owned banks in financial markets are scrutinized very closely by the public and by international organizations such as the IMF and the World Bank. At the heart of the matter, researchers are interested in finding whether state banks fulfill their functions efficiently and effectively or if they promote abuse and economic inefficiency through misallocation of the banking sector's capital.
In this paper, we study the behavior of private sector and state-owned banks in Turkey throughout parliamentary election cycles. Our sample consists of about 2,080 bank-year observations pertaining to 86 banks over the period between 1963 and 2005, during
which Turkey conducted 10 parliamentary elections.  Our study differs from the earlier literature on several dimensions. First,
our study provides a thorough investigation of all types of banks in Turkey over election cycles rather than a knife-edge
comparison of banks' behavior between election versus non-election years. Next, we concentrate on the behavior of a number of bank finance ratios, their growth rates and performance measures rather than a single factor. Finally, by focusing on a single country's entire banking sector, we scrutinize  a consistent dataset which is not prone to sample selection bias or accounting problems that may have affected the results presented in earlier research. We carry out our empirical analysis using the system dynamic panel data (DPD) estimator to allow for a partial adjustment mechanism.
Several findings emerge in a setting where confounding factors are taken into account within the framework of a dynamic model. We can summarize our results as follows. We observe that election cycles significantly affect bank behavior, but that these effects do not differ meaningfully across state, domestic and foreign-owned private sector banks. In particular, there is no evidence that state-owned banks increase their lending in comparison to other bank categories before, during, or after elections. This is an interesting finding, at odds with  the earlier research that has used cross-country or country-specific data to find that state-owned banks behave differently during election years. Furthermore, our regression results also show that election cycles do not lead to a differential impact on other key financial ratios across banks. The second set of results, in line with earlier research, indicate that state banks are generally less efficient in comparison to both domestic and foreign owned private-sector banks.