Dollarization, liquidity and performance: Evidence from Turkish banking

Using a panel of Turkish commercial banks, we examine credit dollarization and its impact on banks' liquidity and profitability. Our estimates suggest that banks partially passthrough foreign denominated funds to borrowers in the form of foreign denominated credit. Furthermore, banks which lend in foreign denominated currency hold less liquid assets and experience higher return on assets. The results suggest that, when the domestic currency is stable, banks in Turkey manage their liquidity aggressively to earn higher returns on foreign denominated funds