Their reactions provide economic incentives for banks to strengthen their management of risk and hold at least adequate levels of capital against their risks. One might say that Basel II seeks an “efficient frontier” of policy objectives through the three pillars. Each pillar provides something that the other two cannot. Each is essential to achieving our overall objective of financial stability. I realise that this analogy of the three pillars as a portfolio of policy options is an oversimplification. But it helps us to visualise why we think that the most “efficient frontier” involves a mixture of minimum rules, tempered by supervisory discretion, and supplemented by market-based incentives. IV. Consistency of accounting standards and a three-pillar system  Of course, our three-pillar supervisory system is highly dependent on a firm’s internal measures of risk exposures. “Basel II,” for example, looks at a bank’s own measures of risk in Pillar 1. Supervisors then engage bank managers in a dialogue on their interpretations of those measures - and the steps managers take in response - in Pillar 2. Finally, Pillar 3 is intended to give the market greater insight into those measures of risk exposures and what the bank may do to control them. Because the three pillars are so dependent on the internal measures, neither supervisors nor bankers can ignore the mechanics that define how financial data are recorded and reported. Those mechanics, as you know, are governed by national accounting standards, which is the last topic I would like to address.

To support this main goal, the Bank was assigned with the duty of maintaining financial stability, and within this context, the Central Bank continued to assess the main risks and vulnerabilities of the financial system and to develop alternative policies against these risks by monitoring the financial system as a whole. In the last couple of years, Turkey has shown a remarkable progress considering the soundness of the economy and the financial system. Today, we have a stronger banking sector, which forms the basis of macroeconomic stability, as well. Of course, considering the dynamic nature of the economies, the conditions do not always stay as what they are especially due to the increasingly interlinked global financial markets. In May-June 2006, international developments such as the deterioration in global liquidity conditions and the decrease in risk appetites of foreign investors towards developing countries, and the uncertainty occurring after it, adversely affected developing countries, including Turkey. However, tight monetary and fiscal policies of the current economic program, on-going structural reforms and flexible exchange rate regime have increased the resilience of the system to shocks. Additionally, the strengthened legal infrastructure and the improved risk culture in the banking sector have alleviated the adverse effects of May-June fluctuations. I believe nobody in this room would deny the fact that today almost all financial developments will have implications for all decision makers around the world-ranging from investors to policy makers. When a decision is made by the FED, ECB, Bank of Japan or China, it is a concern for most countries.