This causes them to turn away from their basic function of intermediation, so essential for the efficient allocation of resources. A system that finances the public sector loses its power. On the other hand, in an environment like that just described and an economy where capital movements have been liberalized, the soundness of banks is especially important. How, then, can banking system soundness be attained? There are four means to this end: 1)  A more efficient and independent supervision system. 2)  Embracing internationally accepted auditing principles. 3)  Improving methods for reducing the financial risks taken by the banks. 4)  The most important is reducing the internal and external imbalances and preserving market stability by creating a sound macroeconomic environment. 5  BIS Review 31/1999  Thus, the most important task for the system belongs to the public. The public authorities have an obligation to prepare the necessary legal regulations immediately and pass them through Parliament. Regulations that are inadequate or not updated only cause problems to accumulate. For these reasons the new banking law has been prepared and submitted to Parliament. The aims of the Draft Law are basically to strengthen supervision and make it more efficient, and to make sure supervision standards remain in line with international standards. The Draft Law was prepared on the basis of the laws and regulations of the European Union and other accepted international practices, and the “25 Core Principles for Effective Banking Supervision” promulgated by the Bank for International Settlements.
As I pointed out in my brief remarks on the financial standing of the banking sector, Turkish banks have reached a level of financial and institutional development that should not be underestimated. But despite all the aforementioned positive aspects, there are also various threats to the wellbeing of the Turkish banking sector which I believe are worth mentioning. Turkish banks, like all the other banks in the world, are exposed to credit risk, liquidity risk, interest rate risk and foreign exchange risk. This is true even in the absence of an environment of global crisis and macroeconomic risks stemming from political uncertainties. These are other issues that merit separate consideration. I will turn now to financial risks. The most important of these is credit risk, which Turkish banks pay the most attention to managing. The Turkish banking sector has become used to accepting and managing credit risk over the years. A credit culture has been developed in which firms, sectors, regions and individuals participate. Increased competition in the sector clearly has implications for the risk-taking process, which requires that the banks restudy their credit strategy. An overall examination of credit risk showed that the banking sector has been able to manage its credit risks by keeping the level of non-performing loans low in spite of an environment of shrinking international financing.