Unlike its peers, the leverage ratios in Turkey stayed at moderate levels  BIS central bankers’ speeches  3  during the period of excess global liquidity, thanks to prudent policies of the Banking Regulatory and Supervision Agency and the Central Bank of Turkey. In fact most of those policies implemented in Turkey since 2002 are incorporated into the Basel III principles, such as countercyclical buffers (banks in Turkey are not permitted to expand unless their ratio is at least four percentage points above the legal minimum) and liquidity ratios (both in local and foreign currency). Debt level of the public sector was also reduced significantly thanks to a quite ambitious fiscal discipline. The real strength of the economy, however, came from the management of foreign exchange risks, which is the most critical aspect of a small, open economy. Thanks to prudent regulations and oversight, the overall FX position of the Turkish banking sector was balanced. Households carried a long position in FX, limiting their exposure to curreny shocks. Although the corporate sector carried a significant FX position, their debt was mainly in long term. All these factors contributed to the resilience of the Turkish economy to the global crisis, which in turn provided ample space to the Central Bank of Turkey to implement front-loaded and aggressive monetary easing without compromising price stability objective. No rescue package was needed to support the banking system. Thus, the government was able to enact modest but still quite effective counter-cyclical fiscal policies in the midst of global turmoil.

But the pricing of liquidity risk was either non-existent or inadequate in fully incorporating the maturity and currency mismatch, contingent and market liquidity risks embedded in the various banking business lines. 36. But liquidity is not only a matter of individual firm’s supervision; it is also of huge importance for the functioning of a whole system, which mainly relies on the liquidity management of a few firms. It is because of inaccurate liquidity risk pricing methodologies that large financial firms have built critical cash flow mismatches, and held substantial holdings of illiquid instruments with overestimated profitability profiles, based on unsustainable leverage strategy. 37. The Basel Committee’s renewed attention to liquidity issues is very topical. A major innovation of the proposed reform package deals with liquidity. In principle, no one will challenge the need to implement liquidity regulation for banks. Indeed, the new regulation will be calibrated and designed to help raise banks’ awareness of the cost of liquidity. Conclusion 38. In the past, financial crises have always triggered important changes in the organization and practice of Central Banking. The latest one is for me not an exception. Central banks have managed to adjust and confront several new, unprecedented challenges rather effectively and, it should be noted, with unprecedented degree of coordination and cooperation. 39. In many countries, the need to develop stronger macro-prudential policies has resulted in new assignments. As for my home county, I can say that having both monetary policy and financial stability responsibilities under the same roof has proved rather useful. 40.