Steps were taken in order to remove distortions in the Turkish economy, to renew the financial system and to change the dynamics of the economy with the purpose of achieving price stability, sustainable public finances and sustainable growth in the long run. First of all, right after the 2001 crisis, economic policies aimed, in the short run, at maintaining financial stability and convincing market participants that sound macroeconomic policies would be put into practice with determination in order to solve the problems of the economy. In my opinion, the most critical change that came after the 2001 crisis was the amendment to the Central Bank Law. The Central Bank of Turkey has been given independence after a period of 30 years of high and chronic inflation. The primary objective of the Bank is now defined as achieving and maintaining price stability. It was a turning point in the economy and highly contributed to the changing dynamics in the Turkish financial system. In addition, it is now explicitly indicated in its law that financial stability is the Central Bank’s auxiliary objective, and the Bank gives utmost importance to maintain it. In the fourth article of the Law, the Bank’s responsibility of financial stability is defined within the framework of the functions of central banks that I mentioned before.
The most important result of international efforts aiming at sound financial markets was the approval of modern risk management techniques as a part of regular financial intermediation process. In this context the Basel II, the new capital adequacy framework, is a very important outcome of the action taken in the international arena. Although, the main aim of the original Basel Accord, which was applying institutionalized and international standards to the global financial system, has not changed in the Basel II Accord, the Basel II puts more emphasis on the risk management aspect of the financial intermediation process. It is expected that a sound and resilient risk management in the banking sector would also lead to more efficient risk management in the real sector. Therefore, in this way, as the financial system becomes more stable, less pro-cyclical and reinforced against shocks, more sources will be available for the real sector. However, it should also be considered that healthy and efficient risk management requires more than the three main pillars of the Basel II Accord. A good understanding of the risks that a financial institution might encounter, a clear definition of risk taking procedures, compliance of risk taking decisions with the strategic goals of the institution, ensuring the risks are within the limits that were set by the management and adequate capital for given risk structure are other essential elements for a more significant advance in risk management in financial institutions.