Of course, accommodating global monetary and financial conditions also contributed to highrisk appetites, high leverage and search for high yields. At this point we do not know the scale of economic fallout from the ongoing financial turbulence, nor its duration. It is, however, conceivable to expect some regulatory backlash by major industrialized countries. For example, just a few days ago the U.S. Treasury Department announced a new plan to overhaul existing financial regulatory structure to make it compatible with modern financial instruments. This is of course just a beginning and we should not be surprised to witness similar steps by other countries. Distinguished guests, Let me turn to the Turkish case and discuss recent developments in Turkey. As you may remember, throughout 1990s the Turkish economy was shaped by high and chronic fiscal deficits, high inflation rates and a weak institutional environment. The economic crisis in Turkey in 2001 was not only the lowest point of this period, but also a major turning point for our economy. Since then we have witnessed a very ambitious reform agenda taken towards reaching better economic governance. I classify these steps under four main categories: (1) Monetary policy, (2) Fiscal policy, (3) Financial stability and (4) Structural reforms. Taking into consideration the fact that I am a central banker, I think it will not be surprising if I start with the topic of monetary policy. Central Bank independence that was granted by Law in 2001 was the key step on the monetary policy side.
And last but not least, good governance requires a fair legal framework and impartial enforcement of this legal system that protects property and individual rights and constitutes a strong base for prudent policy-making. The rules need to be preset, predictable and applied equally regardless of whether the parties in dispute are domestic or foreign, individuals or state. Enforcement of rules in speedy and impartial manner would create a self-fulfilling environment, where adhering to contracts voluntarily becomes the norm and there is little need to formally recourse to the legal system. How can we match governance practices with the current financial turbulence? It is too early to make a judgment about the institutional failures that have led to current financial turbulence, but we have a few clues on what went wrong. Lack of transparency and accountability is at the top of the list. In retrospect there were some important gaps in the U.S. regulatory structure that caused poor underwriting and some fraudulent practices in the sub-prime mortgage sector. Parties in the originate to-distribute chain did not have incentives to generate and provide information on the quality of assets. We can add poor investor duediligence practices and poor performance of credit rating agencies to that list. Public disclosures required of financial institutions were not enough to shed light to the risks  2  BIS Review 38/2008  associated with their on- and off-balance sheet exposures. Public authorities were way behind in assessing and regulating the complex financial instruments created by financial engineers.