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27.6.09

Case Study: Bank Runs in Turkey

This paper is presented in Topics in Middle Eastern and North African Economies (electronic journal, Volume 7, Middle East Economic Association and Loyola University Chicago, September, 2005). While the focus is on the behavioral aspects of bank runs (consumer over-reaction, information asymmetries, self-fulfilling elements, etc.) the authors also make a very interesting comparative analysis of the balance sheets of conventional banks versus Special Finance Houses (i.e. Islamic Financial Institutions in Turkey). The concluding remarks are focused on the benefits of deposit insurance, but the overall piece brings a refreshing view - one that is in stark contrast to claims of Islamic bank's "immunity." It would seem the most important behavior of consumers is their short-term memory!

The Experience of Turkey’s Islamic Banks in the 2001 Crisis
Martha Starr, American University
Rasim Yilmaz, Dumlupinar University

Abstract: "This paper examines a set of runs on Turkey’s Special Finance Houses, an uninsured sub-sector of Islamic banks, during the 2001 financial crisis. We argue that, although fundamental factors were influential in initiating the runs, the magnitude of withdrawals from the SFHs was out of proportion with the risk, suggesting overreaction."

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