Financial liberalization helps improve domestic prudential supervision because local supervisors learn new risk management practices (Mishkin 2003). Financial globalization increases liquidity and lowers the cost of capital, which stimulates investment and economic growth.
Financial liberalization consists of two components. The first component is the internal financial liberalization which results in the lifting of regulations that restrict domestic financial institutions from lending their funds at market rates. The second component is the external financial liberalization which occurs when domestic financial markets are opened to flows of foreign capital and foreign financial institutions.
After a period of financial liberalization, the central bank supervisors already lack the technical expertise to monitor the banks' new lending programs. Without this capacity for prudential monitoring, the local bank regulators cannot stop the banks from doing excessive risk-taking activities. Banks expand their lending activities and go on a lending mood. In countries with well-developed banking sectors, financial liberalization has resulted in lending booms and banking crises in the 1980s in Japan and in 1990s in the United States.
The financial globalization process allows domestic banks to borrow abroad. ...
These effects mirror exposures to common shocks, or potential spillovers arising from the crisis. The first response is to guarantee oversight of internationalized financial institutions. The second is to put in set up cross-border crisis management and arrangements that can manage a severe shock and minimize spillovers. Both responses need the cooperation of multinational institutions. The bank supervisors must check so that the payment systems are robust to withstand a cross-border banking failure, that banking authorities are able to foster trusting relationships to project a rapid flow of sensitive information, and that bank crisis management arrangements are defined.
Countries with systemic cross-border banks like Turkey must be well-prepared for potential problems of bank insolvency and must have the technical and financial capability to coordinate a potential bail-out scenario with foreign authorities taking into consideration the negative externalities of a bank failure.
Turkey had an uncompetitive banking and financial market until the 1980s. It implemented controlled interest rates, promoted competition through directed credit and imposed high reserve requirements. The Turkish banking system also adopted barriers to both entry and mobility. The main barrier to restrictions on financial intermediation, and restricted mobility seems to be the size of the large banks which had a negative effect on competition.
Most Turkish Banks have implemented an uncompetitive pricing system. (Denizer, 1997)
Turkey since 1980 had seen a trend towards the provision of credit through public banks. Public banks account for approximately 30 percent of the total sectoral