I will not dwell here on the value and importance of capital adequacy standards in containing systemic risks – enough has been written on the Basel Accord and Basel II, such that this is well understood. However, consistent with my earlier comments on stress-testing and the importance of modelling behavioural responses, it is crucial the authorities understand banks’ likely responses to changes in minimum capital requirements over the business cycle. In this regard, the Bank and the Financial Services Authority (FSA) have recently developed a framework for monitoring the potential for procyclicality in credit conditions. The Basel Committee on Banking Supervision and the Committee of European Banking Supervisors are working on similar frameworks internationally. 2  Financial Stability Report (April 2007) (http://www.bankofengland.co.uk/publications/fsr/2007/fsr21.htm) & FS Paper No.2: “A new approach to assessing risks to financial stability” (Haldane, Hall and Pezzini) (April 2007) (http://www.bankofengland.co.uk/publications/fsr/fs_paper02.pdf)  2  BIS Review 77/2007  Capital adequacy standards are usefully complemented by “large exposures” rules. In particular, the application of such rules recognises the importance of addressing the risks from an unforeseen event that could cause a bank to incur serious loss, and that major problems could spill over from one bank to another given the network of interconnections. A European Union-wide review of the Large Exposures Directive is underway, offering the opportunity to improve the resilience of the financial system to such spill overs, including in the inter-bank market. Rather less has been written about liquidity buffers and prudential liquidity standards.
With this motivation, I would like to talk now about the main characteristics of the period of transition to inflation targeting regime in this country, a period that indeed lasted longer than planned, and about the main issues that we have faced during this period. I am strongly convinced that there are important lessons that can be drawn from the Turkish experience. Distinguished guests, The Turkish economy has lived through 30 years of high and volatile inflation rates and massive dollarization together with financial sector instability, high public sector debt burden and unstable and low growth rates. Living with such weaknesses for such a long period of time has created a strong inertia in inflation dynamics. Besides, in the latter half of that period, the currency crisis of 1994, contagion effects of Asian and Russian crises in 1997 and in 1998, and finally our own financial crisis in 2001 have been among the many events that increased the vulnerability of the economy. All these developments that negatively affected economic and social life, highlighted more and more the importance of price stability as the primary goal of monetary policy and made all of us realize the importance of a transparent framework for monetary policy that has a clear nominal anchor. Accordingly, the macroeconomic policy framework has undergone major changes and some institutional arrangements have been introduced after and since the financial crisis in 2001.