ProdukHukum BankIndonesia
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
risks and policy challenges that must be observed by the relevant authorities.
Firstly, it is essential that the governments and monetary authorities promptly
specify and clarify their commitment to adopt and implement an effective “exit
strategy” from the policy detours that have resulted in an extremely rapid and
non-sustainable rate of monetary and fiscal expansion. A failure to do so will
deepen the market‟s loss of confidence and exacerbate distrust in policymakers
and in their policy strategy, further delaying any improvement in the functioning of
economic and financial systems. Secondly, a failure to drain and absorb, in a
1
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
also accepts that conventional proactive, counter-cyclical macroeconomic
policies are required to reverse this type of economic crisis. During normal times,
central banks use monetary operations to influence market interest rates, and
thereby manipulate how the economy works.
However, during this time of
market failure the central bank might need to exercise unconventional policies,
such as expanding the central bank‟s intermediary function to offset the decline
of banking sector intermediation.
2
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
considered in the aftermath of the crisis. On a fiscal front, it is widely believed
that the economic downturn has ignited the urgency for fiscal policy to play a role
in supporting the economy. Experience from the recent and past crises has
indicated an increase in fiscal measures following the recession, both to support
the financial sector and to boost aggregate demand. Accordingly, Mr. Carlo
Cottarelli underlined finding the most appropriate fiscal policy in the short term
and formulating key elements of a fiscal strategy that will ensure fiscal solvency.
Along these lines, Mr. Cottarelli suggested a four-pillar fiscal strategy including:
3
(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.
According to Mr.Redrado, as presented by Mr.Castellano, the global economy is
actually experiencing a unique combination of natural catastrophes: extensive
drought in the credit markets, an earthquake on trade and a flood of distrust.
4
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
vulnerable countries. And finally, to maintain an open trade and finance system -
5
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.
Rajagopalan Ravimohan from Standard and Poor‟s affirmed the vital role
of credit rating agencies‟ new paradigm to restore confidence in ratings and in
promoting market confidence. While acknowledging the poor performance of
ratings in the past few years, Mr. Ravimohan assured that in more general terms,
ratings have long played an important role across the full spectrum of the capital
market. Thus, ratings should continue to serve the need for independent, timely
6
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
financial architecture, which is aimed at designing an appropriate market for the
financial sector. Mr. Greenville shared his view that basically the Global Financial
Crisis (GFC) has indicated a complete failure of both the regulatory framework
and the operation of financial markets. In accordance, he proposed a response
7
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
relates to the crisis. The crisis has had dramatic impacts on developing countries
and the poor, as growth sharply declined and reserves fell, culminating in
runaway unemployment and an explosion of poverty. Financial inclusion in this
case can bridge the gap by taking advantage of the huge reservoir of untapped
8
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 muchimproved 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,
mainly through trade channels. And now, unfortunately, Latin America shares a
gloomy outlook for growth, while the full effect over time will depend on whether
the global crisis in the advanced economies is V or L-shaped and will most likely
be different across countries depending on financial conditions. The traditional
immunity of advanced countries like America to third-world-style financial crises
is not a birthright. Financial markets give countries the benefit of the doubt only
because they believe in their political maturity and in the willingness of their
leaders to do what is necessary to rein in deficits, paying a political cost if
9
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,
bank boards, auditors, etc., etc. – have to accept personal responsibility for the
parts they played in creating or exacerbating the crisis; only then can we move
on to fix those areas of the system in need of remedial action. Given the depth of
the global recession and the necessary „deleveraging‟ yet to be undertaken by
banks and consumers alike, anaemic recovery at best is probably all that can be
hoped for in the medium term. Avoidance of the nightmare of deflation may give
way to the spectre of „stagflation‟ as unemployment rises remorselessly and
inflation returns, both because of central banks‟ failure to reverse their
10
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.
Ladies and Gentlemen:
Finally, to conclude my closing remarks, I would like to thank IMF, ADB,
GTZ, The World Bank, and IDB for their financial contributions to this two-day
seminar. Also I would like to extend my heartfelt appreciation to the organizing
committee and all support staff who have ensured the success of this year‟s
seminar. May you all have a safe trip home to your respective countries. Also, I
would like to encourage as many of you as possible to go on the excursion
11
tomorrow; it will be a thoroughly enjoyable and rewarding experience for all
concerned. Once again thank you.
12
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
risks and policy challenges that must be observed by the relevant authorities.
Firstly, it is essential that the governments and monetary authorities promptly
specify and clarify their commitment to adopt and implement an effective “exit
strategy” from the policy detours that have resulted in an extremely rapid and
non-sustainable rate of monetary and fiscal expansion. A failure to do so will
deepen the market‟s loss of confidence and exacerbate distrust in policymakers
and in their policy strategy, further delaying any improvement in the functioning of
economic and financial systems. Secondly, a failure to drain and absorb, in a
1
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
also accepts that conventional proactive, counter-cyclical macroeconomic
policies are required to reverse this type of economic crisis. During normal times,
central banks use monetary operations to influence market interest rates, and
thereby manipulate how the economy works.
However, during this time of
market failure the central bank might need to exercise unconventional policies,
such as expanding the central bank‟s intermediary function to offset the decline
of banking sector intermediation.
2
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
considered in the aftermath of the crisis. On a fiscal front, it is widely believed
that the economic downturn has ignited the urgency for fiscal policy to play a role
in supporting the economy. Experience from the recent and past crises has
indicated an increase in fiscal measures following the recession, both to support
the financial sector and to boost aggregate demand. Accordingly, Mr. Carlo
Cottarelli underlined finding the most appropriate fiscal policy in the short term
and formulating key elements of a fiscal strategy that will ensure fiscal solvency.
Along these lines, Mr. Cottarelli suggested a four-pillar fiscal strategy including:
3
(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.
According to Mr.Redrado, as presented by Mr.Castellano, the global economy is
actually experiencing a unique combination of natural catastrophes: extensive
drought in the credit markets, an earthquake on trade and a flood of distrust.
4
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
vulnerable countries. And finally, to maintain an open trade and finance system -
5
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.
Rajagopalan Ravimohan from Standard and Poor‟s affirmed the vital role
of credit rating agencies‟ new paradigm to restore confidence in ratings and in
promoting market confidence. While acknowledging the poor performance of
ratings in the past few years, Mr. Ravimohan assured that in more general terms,
ratings have long played an important role across the full spectrum of the capital
market. Thus, ratings should continue to serve the need for independent, timely
6
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
financial architecture, which is aimed at designing an appropriate market for the
financial sector. Mr. Greenville shared his view that basically the Global Financial
Crisis (GFC) has indicated a complete failure of both the regulatory framework
and the operation of financial markets. In accordance, he proposed a response
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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
relates to the crisis. The crisis has had dramatic impacts on developing countries
and the poor, as growth sharply declined and reserves fell, culminating in
runaway unemployment and an explosion of poverty. Financial inclusion in this
case can bridge the gap by taking advantage of the huge reservoir of untapped
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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 muchimproved 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,
mainly through trade channels. And now, unfortunately, Latin America shares a
gloomy outlook for growth, while the full effect over time will depend on whether
the global crisis in the advanced economies is V or L-shaped and will most likely
be different across countries depending on financial conditions. The traditional
immunity of advanced countries like America to third-world-style financial crises
is not a birthright. Financial markets give countries the benefit of the doubt only
because they believe in their political maturity and in the willingness of their
leaders to do what is necessary to rein in deficits, paying a political cost if
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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,
bank boards, auditors, etc., etc. – have to accept personal responsibility for the
parts they played in creating or exacerbating the crisis; only then can we move
on to fix those areas of the system in need of remedial action. Given the depth of
the global recession and the necessary „deleveraging‟ yet to be undertaken by
banks and consumers alike, anaemic recovery at best is probably all that can be
hoped for in the medium term. Avoidance of the nightmare of deflation may give
way to the spectre of „stagflation‟ as unemployment rises remorselessly and
inflation returns, both because of central banks‟ failure to reverse their
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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.
Ladies and Gentlemen:
Finally, to conclude my closing remarks, I would like to thank IMF, ADB,
GTZ, The World Bank, and IDB for their financial contributions to this two-day
seminar. Also I would like to extend my heartfelt appreciation to the organizing
committee and all support staff who have ensured the success of this year‟s
seminar. May you all have a safe trip home to your respective countries. Also, I
would like to encourage as many of you as possible to go on the excursion
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tomorrow; it will be a thoroughly enjoyable and rewarding experience for all
concerned. Once again thank you.
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