The industrial organization is a field of economics deals with the structure of firms in the  economy and explores the competition and concentration of firms in the market and related  regulatory policies on the industry. As well as agriculture, manufacturing, and tourism, banking  is also a sector that “industrial” term in an industrial organization refers to. The industrial  organization of the banking sector analyzes the large players in the sector and market  conditions such as concentration and competition level among the players.  

Although in some economic models the financial structure had been disregarded concerning its  effect on real economic outcomes, the financial market conditions might have a direct effect on  real economic variables such as premiums charged for external financing of firms. The concept  of “financial accelerator” that is brought up by Bernanke, Gertler, and Gilchrist indicates that in  times of adverse macroeconomic shocks, relatively small-sized businesses (such as SME’s) have  more limited access to the credit compared with the large players in the economy. Since the  small firms are more vulnerable to experience the pro-cyclical (downsizing accordingly with the  economy during the recession) scenario during the economic recession, the chances of  bankruptcy increase. Henceforth, the external financing (borrowing from banks) for the  relatively small firms becomes costlier due to the increased amount of premium on the  borrowed finance since financing small firms carry more risks for banks. Therefore, lack of or  limited access to the credit during the recession creates even more cutbacks in the production  and it leads to a further decline in GDP growth.  

The concept of "financial accelerator" concerns the lending behavior of banks in the industry  and the industrial organization of the banking sector may affect the level of the effect of  financial accelerator. In this sense, market concentration and competition in the banking sector  are worth to mention. The incremented level of concentration is caused by the dominance of  large banks in the industry and it changes the investment decisions of big banks. The large and  long-run investments by the big banks in concentrated markets lead to the reduced availability  of the adjustments on lending conditions (Turgutlu 4). One might claim that it does not reduce  the effect of “financial accelerator” since the large market share of big banks does not change  their lending behavior for small and medium-sized businesses. However, the deteriorated  ability to adjust the lending conditions of the long-run and large investment projects may  increase the costs of banks during the recessions and it may increment the cost of external  financing for SMEs even more drastically.  

On the other hand, higher market concentration in the banking industry may increase the  availability of monitoring of agents (borrowers) and decrease the external financing premiums.  Consequently, the reduced costs of external financing may weaken the effect of “financial  accelerator”.  

Moreover, the increased concentration level among state-owned banks may determine the  credit access level of borrowers and in this respect counter-cyclical decisions by state-owned  banks would not be an exception. To investigate the existence of counter-cyclical behavior of  state-banks and the role of market concentration in that behavior the loans to the SME’s by  state-owned and privately-owned banks are taken into the account in this report.  

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