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.

The share of foreign currency-denominated loans in the current debt stock of households is rather small compared to other emerging economies, especially those in Central and Eastern Europe. Financial markets seemed to have appropriately appraised these factors, as the risk premium in Turkey deteriorated by a smaller extent when compared to many other emerging economies during the peak of the crisis. Relative stability in financial markets of Turkey has provided our bank more policy space relative to many other emerging economies. The Central Bank of Turkey has used this opportunity to guide expectations. As expectations were further aligned with the policy intentions of the CBT, bond yields decreased to historically low levels. This is an important  BIS Review 123/2009  3  development, because in previous crises real interest would tend to increase, thereby exacerbating the severity of the economic contraction. Current situation reflects the improved effectiveness of Turkish monetary policy and highlights the transformation of Turkish economy. Dear Participants, Turkey has always had a great climate for Green Shoots to blossom. Our recent crisis in 2001 was followed by a strong “V” shaped recovery process. However, despite the signs of partial improvement in domestic consumption in recent months, its strength and durability is questionable. We expect that demand uncertainty and low levels of capacity utilization will continue to weigh down on investment spending and employment. High unemployment will continue to contain private consumption demand and blur the prospects for a solid recovery.