As to liquidity risk, the fact that depositors prefer shorter terms, while investors, driven by expectations of high inflation and uncertainty, prefer longer terms, has caused a mismatching of the maturity structures of the assets and liabilities of the banking sector. As a result, banks become more vulnerable to liquidity risk. Financial distress and global financial crisis were the main ingredients of the conjuncture of 1998. Following scattered failures in the emerging financial environment, almost all emerging economies began to be treated as risky, due to growing uncertainty about the near-term outlook for the financial markets. In this situation, international investors became more cautious about investing in the emerging markets and became reluctant to provide them with credit. Turkish banks slowed their disbursements of credit, preferring to be liquid in the marketplace. We also checked using different ratios for the liquidity in the system. Interest rate risk is another important form of systemic risk. Since the maturity structure of interest-sensitive liabilities in the Turkish banking system tends to favor the relatively shorter maturity segments, external funds are repriced at shorter intervals than assets. This mismatch in the pricing structure at various periods increases the sensitivity of assets and liabilities to changes in interest rates. Banks manage the degree of interest rate risk to which they are exposed during times of rising interest rates by converting their low interest bearing securities into high interest bearing securities by means of repurchase transactions. Interest rate swaps and some other derivative instruments are also used to hedge interest rate risk.
This step was necessary at this time to stop the turmoil in Turkey’s financial markets and calm depositors’ nerves. Now, as we all know, the 100 percent coverage may subject both bankers and depositors to moral hazard in the form of willingness to take greater risks to earn higher returns. Depositors may encounter moral hazard when they ignore greater risks associated with their choice of a depository institution which offers them higher rates for their deposits. But even though all the drawbacks of the present system of deposit protection are well known, current conditions in the world financial environment and their effects on the Turkish financial system have prevented us from making the necessary changes in the existing deposit insurance scheme just now. Once we manage to stabilise the macroeconomic environment, we will be able to reduce the 100 percent coverage to internationally acceptable levels. BIS Review 31/1999  4  How a powerful and effective supervision could be implemented for the Turkish banking system was foreseen many years ago. The system in effect during the 1930s had revealed its inadequacies, but the first step was not taken until 1959 with the establishment of the Board of Sworn Bank Auditors. The system was first applied to the Turkish economy under the direction of the Ministry of Finance. The Board recruited many valuable employees, trained them, and gained the power to supervise the system.