rates applicable to credit cards by banks are announced on the bank ’ s web site. distinguished press members, the reduced credit costs in an environment of falling inflation has enhanced credit opportunities of firms in the corporate sector and has played an important role in the growth of investments expenditures. nevertheless, we consider the open foreign exchange position of firms that utilize foreign exchange credits, despite their lack of foreign currency revenues, as a significant risk factor. therefore, the effective use of risk aversion techniques, taking into consideration the izmir derivatives exchange facilities, is of vital importance. furthermore, considering the likely implications of basel ii, especially on the financial system, both the banking sector and firms should carry out the necessary studies relating to capital accord and accomplish the necessary initiatives and arrangements for the improvement of their corporate management structures. distinguished guests, in 2005, the most outstanding development pertaining to the banking sector, which constitutes 87 percent of the entire financial system, was the gradual acceleration of foreign capital inflows. according to the final figures for share transfers, the share of non - residents in total assets of the banking sector in 2005 was 12. 4 percent. including the portion of shares of non - residents in some banks, which have been agreed upon, although the legal permit process thereto has not been completed yet, the share of non - residents in total assets has reached over 16 percent. comparing the ratio of assets of the banking sector to the gnp in turkey to those of developed countries, it is seen that turkey ranks considerably lower on the list. as long as the favorable developments continue, the banking sector should grow in parallel or, even more. however, it is obvious that in a sector so capitalintense, achieving growth will not solely be domestically. i believe that foreign capital inflows to the banking sector should be handled within this framework. in 2005, while the balance sheet of the banking sector grew in size, the share of tl - denominated assets and liabilities increased. as the crowding - out effect of the public sector diminished, the share of credits in assets continued to increase. this indicates that the banking sector has come close to its fundamental function. despite the fact that the rapid upsurge in credit volume has increased the credit risk, the decline in the npl ratio and the high provisioning policy adopted by the sector during the same period are considered as favorable developments. meanwhile, the monitoring of credit risk, which may increase due to the policies on credit allocation that

durmus yilmaz : financial stability report – ii speech by mr durmus 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. moreover, some definitions are also derived from the concept of instability. in recent years, globalization of financial markets, increased richness in financial instruments, financial deepening and structural changes have caused the system to become much more complicated, thus enhancing the significance of financial stability. any fluctuation that may occur in foreign markets may rapidly spread to other countries. as a matter of fact, recent developments in international financial markets were also reflected on turkey. i can say with great pleasure that the strengthened financial structure of turkey has minimized the unfavorable effects of recent fluctuations. this case, once again, has proven the significance of a sound financial system with risk sensitive policies, which is reinforced by effective monitoring and supervision. it is a widely known and accepted fact that the primary objective of central banks is to achieve price stability. monetary policy is conducted via operations carried out in financial markets and its success depends on the flawless operation of financial institutions and markets. therefore, financial stability is a sine qua non for effective monetary policy. besides, the responsibility of