Northern Rock represented the most extreme case of this, the bank run, starting with wholesale creditors and then on to a full-scale retail creditor run. And it follows from this assessment that banks depend upon maintaining the confidence of their depositors that they will over time be able to meet claims on them. A very important part of maintaining confidence in banks is that the value of their assets – the loans they make, to simplify – has not fallen below their sustainable value in the accounts of the bank. In order to prevent this happening, banks maintain buffers of their own funds – capital – which can be used to maintain the claims of depositors. 1  Liaquat Ahamed: “Lords of Finance” (Windmill Books, 2009), p14. 2  Carmen Reinhart and Kenneth Rogoff: “This Time it is Different: Eight Centuries of Financial Folly”. Princeton University Press, 2009. BIS central bankers’ speeches  1  Here then we have the two fundamental elements of the safety and soundness of banks, liquidity and capital. Banks are often said to fail either because they are insolvent (lack of capital) or because they are illiquid (lack of funds to meet the claims of depositors to be repaid). My own experience of dealing with banks that get into trouble suggests that the reality is somewhat different – it isn’t a case of either one or the other. On the whole, banks lose deposits for a reason – depositors worry that there is something going on that they do not like.
For purposes of this discussion, I will split our economy in two--the real economy and the financial economy. Let me begin my explanation of the present structure of the economy with real variables. - The Turkish economy is a continuously growing, dynamic economy. Its longterm average annual growth rate is over 4 percent and its average annual productivity increase is around 2 percent. In each of the last two years, GNP has increased by around 7 percent, well above most OECD countries. Along with this rapid growth, the composition of the gross domestic product (GDP) has shifted during the last two decades, toward the industrial and services sectors, while the GDP share of agriculture has greatly declined. The share of the public sector in industrial output has also decreased. - Spending on investments has been increasing since the first quarter of 1995. Normally, periods of investment aimed at increasing production capacity last for about 20 months, but the increase in investment activity spending remained focused on increasing production capacity throughout 1995 and 1996. The Economic Trend Analysis of the Central Bank of Turkey shows that no earlier period of expectation of rising investments has ever lasted longer. - Official records show that Turkey’s unemployment rate has been holding fairly constant at around 7 or 8 percent, which is very low compared to the other OECD countries. In April 1996, total employment rose by 2.6 percent and unemployment fell to 6.3 percent. The urban and rural unemployment rates were estimated at 9.3 percent and 3.8 percent respectively.