turalay kenc : stocktaking of international financial architecture remarks by mr turalay kenc, deputy governor of the central bank of the republic of turkey, at the “ stocktaking of international financial architecture ” conference, organized by the reinventing bretton woods committee ( rbwc ), shanghai development research foundation ( sdrf ), research institute for banking and finance, china ( pboc ) and korea institute for international economic policy ( kiep ), shanghai, 26 february 2016. * * * over the last two decades the world has witnessed substantial increases in the trade volume to global gdp ratio, sharply grown international investment positions and significantly deepened production supply chains in the most part of the globe. as a result, monetary and financial policies across countries have become much more correlated. the conference organizers rightly asked the most crucial question whether the international monetary system ( ims ) is still sufficiently stable in this current environment with a growing interconnectedness. in addition to this heightened interconnectedness, the global economy and financial markets face the challenges of the unconventional and unusual monetary policies in the advanced economies as well as diverging monetary policies of these countries, uncertainty in commodity prices, the risk of china ’ s economic hard - landing and the unintended market liquidity consequences of the recent financial sector reforms across the world. large asset purchasing programs of the major central banks have depressed global bond markets with decreasing long - term yields as well as short - term yields and their negative nominal policy rates further destabilized bond markets and in general financial markets. heightened volatility in global financial markets can be associated with the presence of very low and even negative rates rather than the underlying macroeconomic and external imbalances. in these circumstances, any change in interest rate differential across countries is likely to create greater impacts than otherwise. if this interest rate change takes place in the largest and the most significant economy in the world, then the impact will expectedly be further magnified. the fed ’ s start of interest rate normalization has demonstrated that its impact on the global economy and financial markets indeed has been large, giving rise to significant capital outflows from emerging market ( em ) economies, large adjustments and volatility in exchange rates as well as widened em spreads and interest rates. the adverse effects of the fed ’ s interest rate normalization has been on average larger than those occurred in previous two financial turmoil episodes, namely the eurozone sovereign debt crisis and the us tapering tantrum. however

there are two opposing bis central bankers ’ speeches developments affecting the ims. on the one hand, the significant reforms since the gfc have strengthened the ims. but on the other hand, growing interconnectedness especially through increased international investment positions together with unconventional monetary policies pose challenges to the ims. in these global circumstances, having faced the deterioration in inflation and its outlook reflecting the pass - through from the tl depreciation and domestic factors and elevated volatility in capital flows together with tightening global financial conditions the central bank of turkey has been following a tight monetary policy to fight inflation, taking liquidity stabilizing measures for the foreign currency market and ensuring the stability of the financial system. this policy framework was announced as a “ road map ” document back in august 2015 outlining monetary policy, foreign currency liquidity and financial stability related measures and aimed at alleviating policy tradeoffs. the key idea is to provide market making facilities to the local banks when they face financial stresses in the global markets. they are then allowed to borrow in foreign currencies from the central bank and use their all liquid assets irrespective of their denominations i. e., local currency and foreign currency denominated assets as collateral when they borrow from the central bank in any currency. bis central bankers ’ speeches