Does Country Risk Affect Banking Efficiency: Empirical Evidence from Turkey and Selected Countries from the European Union

Abstract

This study explores the readiness of the Turkish banking sector for its accession to the European Union (EU). Obviously, the job is not finished yet, with the challenges of introducing country risk variables and their impact on banking efficiency. Although efficiency analysis remains an important issue in economic studies to answer whether the Turkish banking sector is ready for the accession to the EU. Therefore, this study aims to investigate the impact of country risk levels on banking efficiency in Turkey and the EU in recent years, using stochastic frontier analysis for a parametric technique for the period 2010–2018. In the second stage, efficiency measures are used to investigate the effect of country risk and macroeconomic variables, applying the generalized method of moments. The results suggest that the banking sector operating in a country with low risk tends to perform more efficiently.