Süreyya Serdengeçti: Financial stability and implications of Basel II Opening speech by Mr Süreyya Serdengeçti, Governor of the Central Bank of the Republic of Turkey, at the conference on “Financial stability and implications of Basel II”, Istanbul, 16 May 2005. *  *  *  Financial stability Minister, Governors, Academicians, Guests etc., I would like to welcome you to Istanbul today and thank you all for your participation in this conference. It is an honor for me to host such distinguished speakers and participants in Istanbul. One of the features of the world economy back in the 90’s was the financial liberalization of economies. The ambitious macroeconomic policies of many countries aiming at liberalizing capital accounts, started in fact with developed countries in the late 70’s and spread to developing countries in the late 80’s and 90’s. Another feature of the world economy in the 90’s was the acceleration of capital movements around the world, which I would say is also an outcome of the financial liberalization policies. The comprehensive technological progress in areas of information, communication and computing also highly promoted this active movement of capital across national borders. This impressive change in the global economic environment since the 80s has resulted in important changes in global financial markets. As the figures indicated, during this period, the global financial sector in general and the banking sector in particular developed much more than the real sector did. New financial instruments that were designed for firms’ financing needs provided new opportunities for companies.
We know that recoveries from financial crises tend to be slow; it takes on average about eight years to reach the pre-crisis level of real per capita income following financial crises. 3 Distorted and damaged financial sectors don’t allocate resources effectively. We may not pay the price for a number of years as the boom builds up. But in the end the price we pay is large when a financial system misallocates resources in the boom and in the following bust. Real GDP per head – the best measure of our aggregate living standard – remains 1% below its pre-crisis peak. This high cost to the economy and to society is why we need not only robust regulation of financial institutions but also of the financial system as a whole. Financial stability and sustainable growth are complements. They are not alternatives. Turning back to the reallocation mechanism, there are now some positive signs. The financial sector is well into its recovery. Bank lending growth to non-financial businesses was positive in 2015 Q1 for the first time since the crisis. Beyond the banking system, the Bank’s agents are reporting private equity firms purchasing debt-laden companies and restructuring their funding. The creation of new firms, a sign of vibrancy and reallocation in the economy, increased by 30% in 2013. And labour market ‘churn’, the movement of workers between firms is almost back to its pre-crisis average having fallen sharply in the crisis. In addition, we have seen a return of business investment over the past two years.