Banking sector distress in the North Cyprus economy

The purpose of this thesis is to empirically investigate the micro and the macro determinants of bank fragility in the North Cyprus economy over the period 1984-2002 using a multivariate logit model and logistic survival analysis. The empirical methodology employed in this analysis allows for the distinction between the determinants of the likelihood of bank failure and the survival time. Firstly, the model links the probability and the timing of banking problems to a set of bank-specific factors, then following the identification of bank-specific variables, the approach proceeds by combining these banklevel factors with the macro-environment that may have exacerbated the internal troubles of the financial institutions. The macro factors considered in the analysis are macroeconomic characteristics, financial and structural weaknesses, external shocks and potential contagion effect from Turkey.;The empirical findings suggest that capital inadequacy, low asset quality, low profitability, low liquidity, small asset size, a fall in the real GDP growth, high inflation, rising real interest rates, high credit expansion to public and private sector, a sharp increase in the real exchange rates, adverse trade shocks and high budget deficit, the ratio of M2 to foreign exchange reserves, implicit/explicit deposit insurance, financial liberalization, weak regulation and supervision and external shocks and exchange rate pressure on Turkish Lira played an important role in the escalation of the 2000-2002 banking distress in North Cyprus. Moreover, an empirical examination of the results for survival analysis reveals that low leverage, low liquidity and high credit that extended to the private sector are the main determinants of the time to banks failure in North Cyprus.;Keywords: North Cyprus economy, banking sector, bank fragility, logit, survival.