Recent research highlights that episodes of financial stress are more likely to be associated with deeper and longer downturns. This is particularly true for banking-related financial stress, and helps explain the severity of the recent crisis. Another factor that exacerbated the fallout from the recent crisis was the aggressive use of certain financial instruments. While derivatives can be effectively used for hedging purposes, use of these instruments for speculative gains with high leverage also allows for potentially unlimited losses. BIS Review 123/2009  1  The global recession was another distinctive feature of the recent crisis. The downturn in economic activity was virtually synchronized across both advanced and emerging economies. Increasing interdependence owing to the rapid pace of globalization, as well as the rising contribution of emerging economies to global growth is among the main factors behind the synchronous behavior of global economic activity. Taken together, this implies that there may be less of a role for exports during the recovery. Also the unprecedented fiscal and monetary policy initiatives implemented across major economies makes this crisis truly unique. The awareness regarding the threat to financial and economic stability has emerged across both advanced and emerging economies. To this end, policy dialogues – particularly those fostered during international forums – served to catalyze simultaneous fiscal stimulus packages across some of the largest advanced and emerging economies. On the monetary policy side, at first, many economies cut interest rates sharply with waning inflationary pressures.

Unlike some of its peers, the Turkish banking system did not require any rescue packages or other forms of government support throughout the crisis. The robustness of the Turkish financial system was to a large extent a consequence of the financial reforms implemented in the aftermath of the 2001 financial crisis we experienced in Turkey. Therefore, in contrast to many other countries that have recently revised or put into practice restructuring, supervisory, and regulatory frameworks, many of these were already established in Turkey several years ago. Furthermore, leading into the recent crisis, the Turkish financial system was well capitalized – with capital adequacy ratios exceeding 18 percent – and had relatively low loan-to-deposit and leverage ratios, as well as low levels of foreign exchange rate exposure. Relative strength of the financial sector enabled the implementation of rapid and front loaded rate cuts. No bail out scheme or other forms of public support needed during this period. This has provided room for expansionary fiscal policies. In addition to the sound structure of the financial system, low levels of household indebtedness relative to other emerging economies also contributed to the resilience of the Turkish economy during the crisis. Monetary tightening implemented by the Central Bank between 2006 and 2008 played a critical role in curbing the lending growth and checking the rise in household debt. Prudent and preemptive measures taken by the Banking Regulatory and Supervision Agency in the last 7 years prevented the spread of exchange rate risk among households.