Abstract

The main purpose of this paper is to empirically investigate the determinants of bank fragility in the North Cyprus Economy from 1984 to 2008, using a multivariate logit model. A panel data set containing bank level data for 24 commercial banks together with variables related to the macroeconomic environment. The empirical methodology employed in the article allows for the determination of the factors that influence the probability of bank failure. The model links the probability of banking problems to a set of bank-specific factors and macro-environment that may have exacerbated the internal troubles of the financial institutions. The empirical findings suggested that, capital inadequacy, lower income, lower bank size, high inflation rate, lower growth rate, adverse terms of trade shocks and market pressure in Turkey are important determinants of banking sector distress in North Cyprus.

Key words: North Cyprus, determinants of bank failure, logit model, market pressure index.