It should be borne in mind that in a floating exchange rate regime, economic agents operate in an environment of exchange rate risk. Nevertheless, as repeatedly emphasized by the Central Bank, exchange rate risk is a manageable risk and economic agents should establish the mechanisms that will ensure the efficient management of this risk. Liquidity management Excess liquidity, which was created by the Central Bank’s purchases of government securities worth of YTL 14 billion from state-owned banks and banks transferred to the Savings Deposit Insurance Fund (SDIF) in order to meet their liquidity needs following the February 2001 crisis, as well as the intensive foreign exchange purchases during the 2003-2005 period, persisted in 2006. The Central Bank, withdrew the excess liquidity in the market mainly via New Turkish Lira deposit operations in the Interbank Money Market within the CBRT and Repo transactions in the Repo and Reverse Repo Market of the Istanbul Stock Exchange, on an overnight basis. Accordingly, overnight interest rates were constantly realized around the borrowing rate of the Central Bank. Hence, the borrowing rate of the Central Bank has continued to be an indicator for money markets.
Equity and bond financing have gained in importance relative to lending from banks. This diversification of funding is positive for financial stability, since the dominating role of the banks in providing loans is reduced. From the issuers and also the investors’ viewpoint the existence of active markets ensures good competition, leading to efficiency and favourable loan terms. To sum up, the Swedish financial sector contains many different types of institutions and markets and competition is strong. This is fine, because our crisis taught us the problems of being overly reliant on the banking system. The tendency is that the other institutions take markets shares from the banks, for instance in providing channels for saving. But since many of those institutions form part of bank groups, the bank groups’ overall share of the financial system is not reduced to the same extent. Recent developments in the composition and structure of financial services In addition to the developments in the institutions and markets, we are also witnessing new trends in financial services. Mutual funds, money market funds, equity funds etcetera are growing rapidly. Depositors seek higher yields than those offered by bank deposits and they invest in various securities and asset funds. Banks and other asset managers, including hedge funds, make large profits from this business. The effects on financial stability are unclear. On the one hand, the growth of the funds means more liquidity to the equity and securities markets so they can provide more financing of investments hence reducing the reliance on bank lending.