In the rapidly growing Turkish economy, the ratio of current account deficit to gross national product became 6.4 percent in 2005. The rapid increase in the share of long-term capital inflows and direct investments in the financing of the current account deficit, which is expanding due to high growth rates, is deemed favorable for the sustainability of the deficit. As it is known, in parallel to changing interest rate policies of Bank of Japan, the Federal Reserve and the European Central Bank in recent periods, uncertainty about interest rates has increased globally, leading to capital outflows from emerging markets. Nevertheless, reinforced macroeconomic fundamentals, tight monetary and fiscal polices, the shock-absorbing function of the floating exchange rate regime, the reduced ratio of short-term foreign credits to international reserves and disciplined implementation of the current economic program minimize the adverse effects of outflows on the Turkish economy. 2  BIS Review 68/2006  The rapid rise in the consumption tendency despite the relatively low increase in disposable income increases the indebtedness of households. Therefore, close monitoring of likely risks for the household that may arise from the increasing demand for housing loans, which is still low compared to other countries, is of great importance. Indeed, as seen in (other) country experiences, asset prices can rise rapidly in periods of expansion to be followed by slumps in housing prices, which would simultaneously push down the value of the collateral for the financial sector and decrease household wealth.

Besides, they establish a strong and reliable payment system and take the necessary measures in order to prevent the problems faced by any financial institution from affecting the financial system as a whole. Central banks also function as the “lender of last resort”. Evaluations made by supervisory authorities gain importance as regards the sound monitoring of financial stability by central banks and, effective corporate cooperation with these authorities becomes more critical. I am pleased to say that the cooperation between the Central Bank and Banking Regulation and Supervision Agency, the Undersecretariat of Treasury and the Capital Markets Board as supervisory authorities, is increasingly progressing. The Financial Stability Report, the first of which was published last August, analyzes macroeconomic developments with respect to their effects on sectors, presents analysis and evaluations about the banks and evaluates current and future risk factors. Distinguished Guests, We are undergoing a period where the banking sector has increased intermediary activities, which is the primary function of banks, and where mutual interaction between the sectors in the financial system gains more importance because of the risks that require close monitoring. Therefore, in this part of my speech, I would like to discuss the developments in the banking sector within the framework of macroeconomic perspective and the risks involved. Despite the fact that giant steps have been taken regarding public finance thanks to current tight fiscal policy, maintaining fiscal discipline and achieving the primary surplus target are still of great importance as regards financial stability.