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.

Policy makers very well recognize that financial instability can harm growth and cause serious disruptions, revealing itself in decreased market liquidity, excessive volatility in asset prices and ending up in banking and currency crises. Therefore, many central banks now consider financial stability as an objective complementing the price stability. In recent years, there has been a noticeable increase in central banks’ autonomy in monetary policy, and also a transfer of supervisory and regulatory responsibilities regarding financial institutions to other autonomous bodies. The maintenance of financial stability is, and will remain, a core function for all central banks. In the modern era, central banks' involvement in matters relating to financial stability has become broader and more formalized. Central banks recognize financial stability as an important and self-contained objective. Central bankers see price stability and financial stability as connected due to the fact that serious disruption in the financial system would affect the implementation and effectiveness of monetary policy, while macroeconomic stability helps reduce risks to financial stability. BIS Review 76/2007  1  Obviously, measurement of financial stability is not as straightforward as price stability since there is no single measure or indicator, which shows if the financial system is stable or not. Considering the substantial developments in innovative financial products including hedge funds and the contagion risk inherent in them, accurate statistical data requirements step forward. Moreover, a thorough assessment of financial stability makes it essential to monitor the risks driven by household and corporate sectors.