The Role of Banks' Lending Standards in Determining Creditworthiness of Firms: Evidence from Turkish Banks

This study investigates the interplay between bank lending standards and credit scoring behavior of Turkish banks to SMEs. A Logistic Regression Model has been used by employing CBRT bank and firm-level micro data for the 2017Q1 – 2024Q2 period. First, one of the primary findings of the study shows that easing lending standards supported by excess liquidity conditions of banks significantly contributes to increasing probability of getting a better credit score. Second, we find that this relationship is stronger with the public banks as compared to private banks. Third, the results show that one of the important determinants of the probability of better credit score in addition to lending standards is the 'spread' between CBRT Average Funding Rate and Fed Funds Rate. A number of recent studies have shown that the presence of higher dependence on volatile capital flows in emerging markets may compromise the effectiveness of domestic monetary policy in ensuring financial stability. Third, during 2018 currency crisis, banks seem to adopt more risk-averse lending strategies. Finally, firm-level analysis suggests that banks tend to give higher scores to relatively larger firms during easing lending standards.