Understanding banking sector reforms in Turkey: assessing the roles of domestic versus external actors

Prudential regulation and supervision is a major condition for successful financial liberalization and the proper sequencing of financial liberalization. However, the early ‘sequencing literature’ puts less emphasis on the role of prudential regulation and supervision of the banking system. While the combination of macroeconomic stabilization, trade and financial liberalization was strongly emphasized in the Washington Consensus policies in the early 1990s, less attention was given to the institutional/governance issues within appropriate sequencing. Hence, McKinnon (1998, p. 57) criticized the ‘Washington Consensus’ approach for underemphasizing the need to invest in institutional infrastructure before introducing liberalization reforms, while favouring financial liberalization. Inclusion of prudential regulation and supervision of the banking system to the Washington Consensus approach and to stabilization programmes as an important precondition of successful financial liberalization follows the severe crises in emerging market economies in the 1990s. Especially after the Asian crisis, weak prudential regulation and supervision is regarded to have led to financial sector vulnerability, which was claimed to be at the root of the Asian crisis. Then, the Washington Consensus approach composed a new agenda through encompassing the importance of prudential regulatory framework in its policy line, while financial liberalization continued to be promoted as welfare