ABSTRACT
A key issue that has emerged from the experience of the recent global financial crisis is that a properly functioning banking sector is essential for overall economic health. Indeed, the financial crisis started with a liquidity squeeze following the collapse of a number of banks in the US and then spread to other parts of the world. The contribution of the functioning and the nature of the financial systems in precipitating the financial crisis in the US and the UK, the two largest economies that have been greatly affected by the crisis, has been intensely debated. Although emerging economies have been much more resilient during the 2008-2009 global crisis, a number of these countries have faced collapsing currencies and financial turmoil as recurring events since the early 1990s. The Turkish case was particularly notable. Turkey was hit by a combination of currency and financial crises in 2000-2001, which then turned into the most severe real downturn the country had experienced in its post-war history, with an output contraction of nearly 10 per cent of GDP (see Özatay and Sak, 2002; Özkan, 2005). A closer look at the Turkish experience as well as that of other emerging market countries throughout the 1990s and early 2000s highlights the importance of the institutional framework of financial systems as a determinant of overall financial fragility in these economies.
