The effects of financial
            liberalization and new bank entry on market structure and
            competition in Turkey
Until 1980 Turkey's financial
            system was shaped to support state-oriented development.
            After the 1960s the financial system, dominated by
            commercial banks, became an instrument of planned
            industrialization. Turkey had an uncompetitive financial
            market and an inefficient banking system. Controlled
            interest rates, directed credit, high reserve requirements
            and other restrictions on financial intermediation, and
            restricted entry of new banks -plus the exit of many banks
            between 1960 and 1980- created a concentrated market
            dominated by banks owned by industrial groups with oversized
            branch networks and high overhead costs. Turkey since 1980
            has seen a trend toward liberalization of its financial
            market. Reforms eliminated interest rate controls, eased the
            entry of new financial institutions, and allowed new types
            of instruments. Regulatory barriers were relaxed, attracting
            many banks (both Turkish and foreign) into the system, and
            Turkey's banking system became integrated with world
            markets. The author examines how reform has changed the
            system, focusing on Turkey's commercial retail banking
            market. He finds that: (1) Although reform reduced
            concentration in the industry, leading banks are still able
            to coordinate their pricing decisions overtly. High
            profitability appears to have resulted from the banks
            uncompetitive pricing rather their efficiency.  Deregulation
            and liberalization should be continued and strengthened. (2)
            The entry of small-scale firms alone is not enough to
            increase competition, so new banks should probably not be
            expected to alter the market structure. (3) To promote
            competition will require addressing barriers to both entry
            and mobility. The main barrier to mobility seems to be the
            size of the large banks, which exerts a significant negative
            effect on competition. (4) Interbank rivalry among the
            leading banks cannot be facilitated without creating new
            banks of a certain size with a reasonable number of
            branches. Breaking up public banks (which hold 30 percent of
            sectional assets, excluding the Agricultural Bank and three
            development banks) could help create 15 to 20 new banks with
            40 to 50 branches. This would reduce concentration and
            improve mobility in retail banking. (5) Breaking up public
            banks before privatization would probably also improve their
            governance structures and efficiency. (6) Promoting the
            entry of nonbanks and local banks would also increase the
            number of institutions competing for deposits. Turkey lacks
            a healthy variety of credit institutions and should consider
            developing a mortgage market and creating institutions for
            housing finance.