ProdukHukum BankIndonesia

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Topic: Are Large Financial Institutions Too Big to Manage and Regulate?

Management

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Current financial context makes comparisons difficult

–both big and small financial institutions affected

 Institutions in the FDIC’s Failed Bank List (65 since Jan 2007) come in all shapes and sizes  Some large financial firms have been well managed through the crisis: JP Morgan, HSBC

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Historical Analysis

- 2004 data shows little significant difference by Asset Size

Source: ANL DataSource

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Observations of successful big firms

 World-class management and controls

 Effective use of technology to achieve scale while increasing convenience and maintaining service

 Strong culture

There are examples of large well-managed financial institutions and of countries with success in regulating the financial industry

Regulations

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Governments’ responsibility

: not regulate firms but the industries they compete in and products they sell

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Financial crisis was also the result of regulatory “misses”, which were wide in scope

. Examples:

 US Congress:

 Banking: deregulation repealing banking provisions in Glass-Steagall

 Mortgages: lowering minimum down-payments

 CDS: Commodity Futures Modernization Act allowing trade of Credit-default swaps with limited oversight

 Federal Reserve: in 2001, the Fed funds rate was reduced 11 times from 6.5% to 1.75%

 HUD: require Fannie Mae to dedicate 50% of its business to “low- and moderate-income families”

Total Assets

>US$100bn 10 57.70% 1.39% 3.45% US$40bn to US$100bn 16 53.98% 1.31% 2.95% US$20bn to US$40bn 16 53.77% 1.45% 2.85% US$5bn to US$20bn 64 56.53% 1.29% 2.35% US$1bn to US$5bn 196 57.60% 1.14% 3.12%

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Stability - ownership structure of large banks in Indonesia provide stability

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Impact of 1997/1998 crisis

– “conservative” regulations

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Better coordination between government and Bank Indonesia (e.g. Bank Century case)

Indonesia Focus

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Banking Sector

Of the top 10 banks in Indonesia, 73% of assets are owned by state-owned entities

Name Total Assets (IDR bn) Majority Owner

Bank Mandiri Tbk PT 358,438,700 State-owned

Note: Total bank assets IDR2,311 trn

2004 2006 2008

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Indonesia Focus

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Financial Sector Proportion in the Economy

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Financial sector in the economy

- financial sector still represents a small part of the economy in Indonesia vs. industrialized countries

Source: Bank Indonesia

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Size of the economy has also likely limited the size of banks

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Domestic Consumption driven GDP

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natural diversification of risk

The banking sector still represents a small part of the Indonesian economy

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Indonesia Focus

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Financial Supervision

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Internationalization - as Indonesia grows through increased FDI and focus on exports, the weight of the financial

services sector in the economy will grow and naturally become more international

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Link to natural resources

 Need for collaboration between government agencies, ministries and sectors

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Potential future changes in regulatory structure

 Bapepam –LK

 BI (independent)

 New regulatory body: FSA (UK), MAS (Singapore)