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We examine how the cross border banking loan liabilities (syndication and securitization loans) and the exchange rate affect the Turkish banking industry profitability using a balanced panel data for the period 2003Q1-2016Q3. We study with different subsamples and model specifications. Overall, we find that the banking sector financial inflows are positively associated with bank profitability. Specifically, the results show that the banking sector cross border inflows have significant and positive impact on return on assets (ROA), return on equity (ROE) and on net interest margin (NIM). The long-term inflows play a more important role than the short-term inflows in explaining profitability in all specifications while short-term inflows have no any significant effect on these profitability indicators. Moreover, we show that the exchange rate has significant and negative impact on ROA and ROE and has insignificant effect on NIM. Our findings are more notable in private banks compared to the whole sample. Given the fact that the existing studies examine the banking profitability through aggregate capital inflows and maturity mismatch, this study will fill a meaningful gap in emerging market literature.

CROSS-BORDER LOAN LIABILITY, THE EXCHANGE RATE AND PROFITABILITY IN THE TURKISH BANKING SECTOR