In the context of what we have experienced since the late 2010, I believe it will be useful to discuss unifying the BRSA and the CBT.

There is a common belief that monetary policy practices of developed countries also played a role in the process that dragged us towards the global crisis. Due to this, there is an ongoing quest for a new academic framework for monetary policy. Some monetary economists are trying to answer the question, “What type of inflation targeting regime can protect financial stability as well as price stability?” There have already been released a couple of qualified academic studies. I said ‘some monetary economists’ since some studies do not necessarily limit themselves to inflation targeting regimes. Today let me address some preliminary findings of these.

Apart from these studies, the number of questions in my mind as to the extent to which the current institutional regulation is suitable for the implementation of a monetary policy that protects both financial stability and fiscal stability has been growing. 

The Central Bank has failed
Let me pose a question before focusing on the institutional structure: What would have happened if the Central Bank of Turkey (CBT) had not increased reserve requirements and had settled with the decisions the Bank Regulation and Supervision Agency (BRSA) was to take (raising capital requirement ratio or increasing the risk weight of certain loans for instance)? The answer of this question must be clear judging by previous commentaries on this column on this issue, which had been validated later with practice: It would have been quite nice.

The CBT’s decision to increase required reserve ratio failed to lower the rapid credit supply growth. We learned this by experience. In fact, this is clear judging by the CBT’s presentations, as well: graphs show that credit growth rate started to slowdown only after the BRSA had stepped in.

I do not want to discuss the decisions the two agencies had taken or the timing of these decisions. At this stage, judgments like “This one was right, the other one was wrong” do not interest me. Let’s say the aim to lower the pace of credit growth was correct in terms of securing both financial stability and price stability. What if the CBT’s was not authorized to take the appropriate decisions? 

New institutions have been formed
Before the global crisis, it was generally agreed that the main objective of central banks should be to maintain price stability. It was of course accepted that central banks could play an important role in ensuring financial stability. However, there was nothing wrong in securing financial stability via institutions other than the central banks. In fact, it was argued that this was a better option. Taking departure from this view, many countries had delegated the banking regulation and supervision authorities to other institutions, that is, they had formed new institutions the main objective of which was to maintain financial stability. The role of central banks in this regard had been weakened. Today, the world has been discussing to which extent this current institutional structure is healthy.

In the context of what we have experienced since the late 2010, I believe it will be useful to discuss unifying the BRSA and the CBT (completely or in part).

This commentary was published in Radikal daily on 03.12.2011