Within this framework, assuming that financial markets always operate efficiently, we can list the reasons for the crisis as deregulation, financial innovations, problematic accounting standards and global instabilities. The liberty brought by deregulation led to shortsightedness  BIS Review 79/2010  3  driven by over-confidence and short-term profits were preferred at the cost of risking the financial system in the long run. Financial innovations generated complex derivative products, where who owes how much to whom is not clear and, which actually lead to multiplying of risk instead of distribution of it. Meanwhile, the accounting standards based on “Fair Value” principle made cyclical effects and fuelled the destructive power of the crisis. Having mentioned the stages and reasons for the crisis, now I would like to share with you the monetary policy implemented by the Central Bank of Turkey during the crisis and my evaluations on the recent developments in the Turkish economy. Projecting that inflation would decrease sharply as of the last quarter of 2008, the Central Bank of Turkey implemented a monetary policy focusing on restraining the potentially harsh impact of the global financial crisis on financial activity without conflicting with the primary objective of maintaining price stability. During this process, the CBT has delivered sizeable cuts in policy rates and a counter-cyclical monetary policy has been implemented with the aim of supporting the smooth operation of credit markets. Between November 2008 and November 2009, the CBT cut policy rates by 1.025 basis points, playing a pioneer role among central banks of developing countries.
In normal times, if the ECB lowers its key rates, the banks’ financing costs decrease, allowing them to pass these lower costs on to the lending rates they offer to customers, companies or households. BIS central bankers’ speeches  3  However, we noticed that this channel was no longer functioning correctly in the euro area. In fact, we noticed that a drop in key rates was feeding through to lower lending rates in certain parts of the euro area, but not everywhere. This means a fundamental aspect of our monetary policy and of its efficacy – i.e. its singleness – was impaired. As a result, major differences in bank lending rates appeared across euro area countries, which could not be explained by disparities by the fundamentals of the countries concerned. For example, two hotels with the same activities and financial characteristics and located on each side of the Austro-Italian border are obliged to borrow at substantially different rates. This is not because of a real difference in the credit risk. In reality, this rate differential stems from the fact that certain segments of the financial markets had developed fears regarding a possible break-up of the euro area. They were adding to the rates they were offering certain countries a risk premium to cover a “re-denomination” of bonds into the local currency.