The number of kinds of risk has grown, and the varieties of non-financial institutions have multiplied. All these changes together call for a sounder banking system. They remind us of the fact that sound banking is a continuous process. The importance of risk management in various kinds of situations is well understood. In today’s environment, our understanding that a sound and efficiently functioning banking system is a fundamental necessity is once again reinforced. So what have we in Turkey done to meet these exigencies? The Turkish banking system is not a recently established one. Turkey has a deep-rooted banking tradition that goes back to the 19th century. During the last two or three decades, the banking sector has played a prominent role in the Turkish financial system, and has made considerable progress, aided to some extent by structural changes, towards making the Turkish economy more financially liberalized. In response to the restructuring of the Turkish economy and to the need to integrate Turkey into the modern world of finance, Turkish banks have made major changes both in their institutional structures and in the quality of services and products they offer. As a result of the greater freedom that comes with market-oriented policies and a liberalized financial environment, many entrepreneurs, foreign as well as domestic, have been attracted by the potentially profitable Turkish banking system. 1  BIS Review 31/1999  During the last two decades, the number of banks active in the banking sector has grown from 43 to 74.

As to liquidity risk, the fact that depositors prefer shorter terms, while investors, driven by expectations of high inflation and uncertainty, prefer longer terms, has caused a mismatching of the maturity structures of the assets and liabilities of the banking sector. As a result, banks become more vulnerable to liquidity risk. Financial distress and global financial crisis were the main ingredients of the conjuncture of 1998. Following scattered failures in the emerging financial environment, almost all emerging economies began to be treated as risky, due to growing uncertainty about the near-term outlook for the financial markets. In this situation, international investors became more cautious about investing in the emerging markets and became reluctant to provide them with credit. Turkish banks slowed their disbursements of credit, preferring to be liquid in the marketplace. We also checked using different ratios for the liquidity in the system. Interest rate risk is another important form of systemic risk. Since the maturity structure of interest-sensitive liabilities in the Turkish banking system tends to favor the relatively shorter maturity segments, external funds are repriced at shorter intervals than assets. This mismatch in the pricing structure at various periods increases the sensitivity of assets and liabilities to changes in interest rates. Banks manage the degree of interest rate risk to which they are exposed during times of rising interest rates by converting their low interest bearing securities into high interest bearing securities by means of repurchase transactions. Interest rate swaps and some other derivative instruments are also used to hedge interest rate risk.