Closing Remarks
Prof. Miranda S. Goeltom
Acting Governor of Bank Indonesia
Fellow Governors and Deputy Governors, distinguished guests, ladies and gentlemen:
I would like to begin by firstly congratulating all speakers and participants for their excellent presentations and fruitful discussions during this two-day seminar held in such salubrious settings. I sincerely believe that the exchange of views, ideas and experience among central bankers, commercial bankers and the business community will enhance monetary policy and financial policy in support of economic recovery in these times of a global financial tsunami, and to ensure its sustainability in the long run.
Now that we have come to the conclusion of the seminar, allow me to close with several salient points and comments made by the distinguished speakers at this forum. After I officially opened the seminar, my very good friend, Jacob Frenkel kicked off the discussion by delivering his keynote speech outlining the risks and prospects of the global economy and financial system. He elaborated a number of issues including how the ongoing global financial debacle has undermined many aspects of economic underpinnings. For that reason, he revealed several
timely manner, the vast amounts of liquidity that were injected by central banks will result in inflation and erode the already damaged credibility of central banks. Ultimately, it could also give rise to political attempts to restrict the independence of central banks. Thirdly, the huge increase in budget deficits has induced a rapid increase in the size of public debt. A failure to restore budgetary discipline will aggravate this undesirable trend and necessitate the imposition of higher taxes, as well as precipitate greater reliance on government borrowing which, in turn, will result in higher real rates of interest. Fourthly, greater government
ownership of financial institutions poses significant challenges to the appropriate governance of such institutions. It also sends bewildering signals regarding government intentions concerning their own role in the economic/financial system. Finally, governments must avoid protectionism and slow regulatory reform that could retard the global economic recovery.
After Jacob‟s enlightening presentation, we began Session 1 by reconsidering the role of macroeconomic policy in times of financial turmoil. The first speaker of the session, Minister Sri Mulyani Indrawati, spoke about the challenges facing authorities to reverse the economic downturn. Dr. Indrawati clearly stated that the question of whether the tools of conventional macroeconomic policies are enough to reverse the economic downturn is not a hypothetical question. She then asserted that this question must be answered by economic and finance officials around the world. However, she strongly believes that the global economic slowdown as a result of the global financial crisis can be reversed. She
Governor Atiur Rahman from Bangladesh Bank emphasized the crucial need for a basic subsistence safety net and opportunities of alternative employment for the despondent, laid-off workforce to avoid prolonging the recession. The
Government and Central Bank of Bangladesh have proposed and are conducting people-focused intervention, co-opting initiatives of the financial system, including microfinance NGOs. The Bangladeshi Government and Central Bank have placed special emphasis on the agricultural sector to generate new
employment opportunities and output. Bangladesh Bank itself has made engagement in agricultural financing mandatory for all banks, with refinance support available if and where needed. Awareness of corporate social responsibility in the financial sector has been heightened to promote spontaneous proactive engagement in programs dedicated to improve the welfare of the people. Other measures initiated by the Government of Bangladesh and Central Bank include: shifting reserves invested to central banks, relaxation of loan rescheduling policy, re-fixation of interest rates, rationalization of service charges, and strengthening bank capital. Mr Rahman expressed confidence in well-designed and properly coordinated policies and stimulus packages to help the global economy rebound from the global recession. However, Mr Rahman also encouraged all of us to ensure that populations let down by the failed markets and institutions do not lose out in priority to bailouts of the markets/ institutions that failed them.
Carlo Cottarelli from the IMF detailed effective fiscal policy that should be
(i) fiscal stimuli as temporary measures, (ii) medium-term fiscal framework, (iii) structural reforms to enhance growth, and (iv) tackling long-run pressures from an aging population.
Ladies and Gentlemen;
During the second session we listened how to avoid a prolonged economic
slump as a result of the financial tsunami. I opened the session by shedding light on how to address the increasing risk perception on the financial system and transmission mechanism of monetary policy in times of financial turbulence. In this session, I demonstrated how changes in the economic environment; driven by behavioural change as well as the increasing role risk perception plays in the global financial system. This shift in the economic environment, coupled with the effect of closer integration in the financial sector, has led to increasing complexity of monetary policy management, especially regarding how to identify inflation risk and accurately analyze monetary policy effectiveness. It is crucial to note that that this newfound complexity in terms of monetary policy management implies that the monetary authority should not only expand the scope of existing policy but also facilitate a shift in policy paradigm to adjust to the changes in the economic environment. The policy implications that arise for a central bank from the impact of rapid changes in the financial sector and that ultimately carry the risk is the achievement of macroeconomic stability, which not only relates to price stability but also interacts with financial stability. In this regard, crisis dynamics
that have shown positive effects on price stability and support sustainable economic growth rapidly diminish or could even disappear completely when the financial system is beset by a shock, such as the current crisis. This leads to the urgent requirement for integrated policy encompassing monetary policy, banking policy and the other strategic policies taken by other authorities.
Accordingly, the roadmap for a sustainable recovery should include several features such as: 1) long-term funding, 2) repairs to the household and bank balance sheet, and 3) long-run fiscal and monetary sustainability. Based on
experience garnered in Latin America in terms of dealing with the crises of the 1990‟s and 2000‟s, Redrado shared his views on a number of salient topics that need to be addressed at the national and supra-national levels. Redrado insisted that one of the key structural changes is financial stability. At the national level,
both developed and emerging countries have had to adjust monetary schemes focused on the interest rate as the single instrument to maintain stability. Under a supra-national framework, the roadmap should have at least: 1) greater convergence in financial regulation and supervision standards among countries; 1) a rethink of the role of the IMF; 3) reinforcement of macro-prudential supervision and regulating tools; 4) reformulation of asset valuation methods; 5) avoidance of regulatory arbitrage and tighter control of shadow banking; and 6) redefinition of the credit ratings agencies‟ function. It was mentioned that the IMF has indeed taken a series of measures, however, they are only “baby” steps. Summing up Redrado‟s paper, Mr. Castellano, expressed his belief that a stable global financial market would reduce the “parking” of liquidity, leaving the possibility of diverting resources more efficiently and helping our respective countries catch up to the development required by our societies.
Mohammad Zia M. Qureshi from the World Bank highlighted the impacts of the global financial crisis on developing countries and priorities in policy response. In responding to a development emergency, Qureshi outlined several priorities for action. First is to ensure an adequate fiscal response in support of growth and to protect the poor -consistent with the maintenance of
macroeconomic stability. Second is to improve the climate for recovery in private investment -including paying special attention to strengthening financial systems. Third is to redouble efforts toward human development goals -including leveraging the private sector‟s role. Fourth is to scale up aid to the poor and
-including quick action on the Doha Round, as well as ensuring that the multilateral system has the mandate, resources and instruments to support an effective global response to the global crisis.
Ladies and Gentlemen:
Session three consisted of constructive discussion regarding the abuse of
advanced financial products due to either market imperfections or poor regulation and supervision, or even both. Gita Wirjawan from PT. Ancora International
opened the third session and exposed the “meanness” of advanced (derivative) financial products in market imperfections. He insisted that a decrease in global over-the-counter (OTC) derivative notional amounts in the second semester of 2008 was evidence that a few actions taken by banks and governments are succeeding. However, gross market value (GMV) of OTC derivatives continued to increase sharply over the past year. This is categorical proof that the size and potential downside risk of derivative contracts remain high. In particular, CDS, which is considered the most dangerous derivative instrument, represents an increasing proportion of total notional amounts outstanding (6% of notional). Asymmetric risk and rewards embedded in CDS exerts downward pressure on the bonds underlying the contracts. This is placing companies and financial institutions in jeopardy. Mr. Wirjawan raised the idea to underwrite CDS in a Shariah-compliant context. However, he was unsure that this was feasible because Shariah law does not allow speculation and all counterparties would
need to be properly educated and well-informed in the transaction.
and quality analysis in the future. Unfortunately, market confidence in the ability of ratings agencies to perform these functions has been shaken to the core recently and needs to be restored post haste. This will require both meaningful
private initiatives and appropriate government action. Along these lines, Mr. Ravimohan underlined the initiatives taken by S&P aimed at restoring confidence, which include four core principles: transparency, governance, analytical quality and responding to the needs of investors. Concomitant
government action in the form of increased regulation of ratings agencies should feature “end-to-end” solutions, international consistency, analytical independence and an accountability framework.
Simon Morris, CEO of Standard Chartered Indonesia, stressed the importance of managing and regulating large complex financial institutions to prevent a repeat of the crisis. He argued that among the failures we have made, a far bigger failure – shared by bankers, regulators, central banks, finance ministers and academics around the world – was the failure to identify that the whole system was fraught with market wide systemic risk. In particular, it seems that we failed to realize there was an increase in total system risk to which financial regulators – authorities, central banks and fiscal authorities – needed to respond. Consequently, a renewed spirit to strengthen the financial regulatory regime - regulatory reform - has become the top agenda within policy circles, with a focus on mitigating such market wide systemic risk.
Ladies and Gentlemen:
Stephen Grenville opened Session 4 by presenting the Indonesian
attacking on two fronts: firstly, strengthening regulation and secondly ensuring a robust and resilient financial sector structure.
In the case of Indonesia, with its financial sector dominated by banks, Mr.
Greenville suggested that banks should specialize in domestic deposits and loans, as well as payment services: namely, an end to universal banks. Where macro-prudential issues are important, the logical candidate for prudential bank supervision is the central bank because of its macro-focus. In addition, there
needs to be a high-level, overarching body that oversees three areas: system architecture and regulatory consistency; high-level system stability (especially interconnectedness and endogenous risk); and crisis coordination. KSSK should evolve over time to do this job and in the process become the OJK.
My former colleague, Dr. Bambang PS Brodjonegoro, representing the Islamic Research and Training Institute, shared his ideas of what Islamic Finance can contribute to global financial stability. According to Brodjonegoro, several features of Islamic Finance that may be useful in strengthening the global financial architecture include the following: that all transactions must comply with sharia rules and principles; that finance can only be extended for projects, trade, economic and commercial transactions; that speculation is prohibited “don’t sell what you don’t have”; that the sale of debt and rescheduling of debt on the basis of earning interest is prohibited; that investment in equities has to pass a set of screening processes; genuine liquidity must be preserved as opposed to synthetic liquidity; strong incentives must be provided to institutions in order to
ensure the success of the projects and activities that they finance; and finally to emphasize transparency, disclosure and the documentation of contracts.
Further, Mr. Alfred Hannig highlighted the issue of financial inclusion as it
economic potential, which would in turn create jobs and help improve financial stability. The Crisis can in fact help unlock these opportunities in a number of ways. First, the crisis has underscored the need for the government to regulate
the free market, thus putting policymakers, who are involved in financial inclusion, back in the driving seat. Second, the crisis has precipitated efforts to reform the financial system, including innovation in financial inclusion policies. Third, the crisis has provided an opportunity to shift the balance from credit to
savings while debt is still out of favour. Lastly, the crisis has also provided a chance to link social security policy initiatives in developing countries with policies to increase access to finance for the poor.
Ladies and Gentlemen:
The final session, this afternoon, included four enlightening presentations in a panel discussion. In his presentation, Domingo Cavallo, Chairman and CEO, DFC Associates, LLC, explained that the current financial tsunami initially did not seem to produce strong impacts in Latin America. Until the third quarter of last year, only spillover effects were recognized, primarily through the channels of financial sectors. By the third quarter of 2008, Mr. Cavallo argued that Latin American economies would be decoupled from the crisis due to their much-improved fundamentals compared to previous Latin American economic crises. However, rather unpredictably, by the fourth quarter of 2008, the damaging impact on Latin America of the global crisis became quite large and strong,
necessary. And in the past that belief has been justified. However, if the persistence of fiscal deficits of a perceived matured country continues, investors will eventually conclude that such countries, including America, can be turned
into a third-world country, and start to treat them like one.
The second speaker, Prof. Max Hall, elaborated the UK approach to accelerate sound policy in order to regain financial stability. Accordingly, the UK
financial system has suffered terribly from the current crisis. It was caused by vulnerabilities of the UK economy and weaknesses within the UK banking system. This financial tsunami has brought about significant casualties like Northern Rock, Alliance and Leicester, Bradford and Bingley, HBOS, RBS and Lloyds TSB. In his presentation, he explained in detail and holistically assessed the measures taken by the UK authorities in abating the problems of each bank. He concluded that much has been learnt from the current crisis. For example, the current level of globalization in finance and trade ensures that there is no hiding place from financial and economic shocks, such as those deriving from the current financial tsunami. Thus, a carefully coordinated, global response is necessary if global stability is to be restored.
Prof. Hall added that while the IMF has been quite successful in securing the implementation of its preferred mix of policies by Western governments, little has been done to address the problem of global imbalances, a root cause of the crisis. Hence, all parties – from bankers and traders to central bank officials, politicians, finance ministers, regulators, supervisors, investors, rating agencies,
accommodative stance quickly enough and because of governmental pressure to inflate away their burgeoning debts.
Halim Alamsyah explained that the Indonesian financial system remains shallow, and therefore, provides ample opportunities for financial development. Banking institutions are dominant and profitable; nevertheless, are less efficient than those of their South East Asian peers. The banking industry is to some
extent well protected and has captive sources of income (placements in SBI and government bonds). Against this backdrop, the vision for a future supervisory regime has been voiced. First, financial system stability must be defined as an ultimate objective. Secondly, the regime must have room for financial deepening, including greater financial inclusion and greater choice of financial instruments.
In the final presentation of the afternoon session, Michael Pomerleano from IDB Institute outlined the need to resolve cross-border bank problems using the East Asian case as an example. To resolve cross-border bank problems in East Asia, Mr Pomerleano proposes several solutions. Firstly, we shouldn‟t wait for dramatic changes at the global level. Secondly, we should clearly confirm our objective to develop vigorous regional financial and monetary institutions. Finally, we should invest in domestic and regional building blocks,to complement and lead to ultimate global financial stability.
