A LESSON LEARNED? PRE- AND POSTCRISIS ENTRY DECISIONS IN TURKISH BANKING

I. INTRODUCTION The banking crisis of 2000-2001 was a significant turning point in the Turkish banking sector. Prior to the crisis, there were two decades of poor decision making, ineffective regulation, and intermittent crises. After the crisis, the banking sector took some steps toward stability and profitability following the restructuring program initiated in 2001 (Kibritcioglu, 2005). However, it is not yet clear whether these policies have prompted a permanent change in the business strategies of Turkish banks. This study is an attempt to determine whether diversification and entry decisions of banks have changed during the postcrisis period. The geographical diversification decisions of banks, captured by their entry into new markets, have recently attracted interest in the banking literature. A number of studies investigate the impact of structural changes on entry decisions in the banking sector. For example, Berger et al. (2004) examine the link between mergers and acquisitions (M&As) and bank entry into local markets in the United States. Similarly, studies by Fuentelsaz and Gomez (2001), Gobbi and Lotti (2004), and Felici and Pagnini (2008) have looked at postderegulation bank entry patterns in Spain and Italy. This study extends this literature by looking at the impact of structural change (the postcrisis restructuring program) on entry decisions of banks while accounting for both firm and market-level characteristics. Of course, the Turkish restructuring program was different than deregulation in the United States, Italy, or Spain since it did not involve the removal of branching restrictions. However, the large number of bank closures during the crisis (the number of deposit-collecting banks fell from 54 to 40) suggests that the structural change in the Turkish banking sector has been equally significant. An examination of entry decisions in the face of structural change is important since expansion does not always lead to positive outcomes. Entering new markets can help banks realize efficiency gains through economies of scale and scope and reduce their risk by diversifying across different regional economic conditions. However, if not managed properly, entry can reduce bank efficiency by increasing agency costs and spreading bad management practices over a larger pool of resources (Berger and DeYoung, 2001). In the case of the Turkish banking sector, there is some evidence of poorly managed geographical expansion prior to the crisis, leading to large and inefficient branch networks. For example, Ozkan-Gunay and Tektas (2006) argue that overall efficiency in Turkish banking declined significantly in the years leading up to the crisis, as capacity in the sector exceeded the amount of banking business that the economy can support. The goal of this study is to determine if this was the case and to investigate whether the expansion strategies of banks improved following the crisis of 2000-2001 and the subsequent restructuring. Results of the empirical analysis reveal changes in the entry decisions of banks following the introduction of the restructuring program. While the precrisis entry decisions do not appear to be fully in line with economic fundamentals, postcrisis entry strategies are more stable and sound, with banks avoiding markets featuring dominant incumbents. This finding, which could signal that the restructuring program has achieved its goal of "rationalization of branches and personnel" and "cost reduction," (1) is the main contribution of this study. Furthermore, the examination of pre-2000 entry decisions suggests that the lack of sound entry strategies may have increased banks' operating costs, contributing to the advent of the crisis. The rest of the study is as follows. Section II reviews the pre-and postcrisis Turkish banking sector. Section III discusses a general model of entry, specifies the empirical approach, and describes the data set. …