The Banking Sector Restructuring Program and other measures that were taken following the 2001 crisis, led to the formation of a very strong and resilient financial system. This contributed to the high growth rates achieved after the crisis. I can comfortably say that today the banking sector in Turkey compares well with those of new members of the European Union. The Banking Law enacted in 2005 is in line with the best international practices. Asset size of the Turkish banking sector increased by more than three-folds in the last six years and reached USD 500 billion as of 2007. Still, there is a huge and unexplored potential in the sector taking into account the size of Turkey’s young population and low rate of credit utilization among households and private business. Capital adequacy ratio (CAR) of the banking sector stood at 18.8%, well above the minimum legal requirement of 8% and the average of the European Union, which is 12.1%. Short-term liquidity ratios comfortably meet the legal thresholds. Thanks to sound and resilient structure of the sector, foreign direct investment to the Turkish banking system has surged since 2005 and the share of foreign investors in the total capital of the sector is now more than 40%. Rather than financing government deficits, the banking sector has returned to its core function, which is being intermediary between borrowers and lenders.
It never crossed my mind back then that one day I would be working on the problem of how to provide monetary accommodation in an economy with massive unemployment, very low inflation (perhaps even too low) and a policy rate stuck at the zero lower bound. With the exception of scholars of the Great Depression, back in the 1980s today’s policy challenges were not on anyone’s radar screen. Of course, that changed with the developments in Japan during the 1990s. More macroeconomists began thinking about liquidity traps and the monetary policy tools to help escape from them. These analyses gained momentum following Paul Krugman’s Brookings paper in 1998.1 They focused both on the use of the central bank’s balance sheet to provide accommodation and on communication about policy goals and forward guidance about the path for policy instruments. Much of this latter work was done within the New Keynesian paradigm, since communications are central to the policy transmission mechanism in those models.2 For obvious reasons, such research has come back into vogue today. The nonstandard policies emphasized by these lines of research have been important elements in the Federal Reserve’s toolkit over the past four years. The Federal Reserve engaged in two waves of large-scale asset purchases (March 2009 and November 2010), and, more recently, extended the maturity of the assets on our books (September 2011).