Durmuş Yilmaz: Financial Stability Report – II Speech by Mr Durmuş Yilmaz, Governor of the Central Bank of the Republic of Turkey, at the presentation of the “Financial Stability Report – II”, Ankara, 13 June 2006. *  *  *  Distinguished Guests, Dear Members of the Press, Last August, we shared with you the first Financial Stability Report, which we consider to be supportive of price stability, our primary objective, and involves a compilation of our studies on the evaluations of financial stability. I am happy to present the second report to you today. I would also like to remind you that this report will be on the Bank’s web page as of today. Today, I would firstly like to focus on the definition and significance of financial stability and central banks’ approaches to the issue. Then I will touch on the duties and powers of the Bank regarding financial stability. Lastly, I would like to emphasize the main points in the Financial Stability Report. Distinguished Guests, Providing a clear definition of financial stability is as difficult as achieving and maintaining it. In a broader sense, financial stability can be defined as the condition of an economy’s mechanisms for pricing, allocating resources and managing financial risks functioning well enough to contribute to the performance of the economy. 1 The European Central Bank defines financial stability as a condition whereby the financial system is able to withstand shocks without impairing the transformation of savings to investment opportunities.

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.