BI to intensify banking sector reform: Soedradjad
JAKARTA (JP): Bank Indonesia Governor J. Soedradjad Djiwandono said the government would intensify financial reforms after last month's closure of 16 private banks.
Speaking at a conference here Wednesday evening, Soedradjad said the central bank would consistently pursue policies to create a sound and secure banking system.
"Within this framework, we will intensify our efforts to consolidate the banking sector," Soedradjad said at a conference of Indonesian and American economists on sustaining economic growth in Indonesia.
Efforts would include bank restructuring by encouraging mergers or acquisitions between commercial banks, promoting the use of proper risk management techniques, increasing professionalism and using appropriate information technology.
Indonesia's bloated banking sector, like that in other countries in the region, has been cited as a central cause of the country's financial crisis.
The rupiah has plunged almost 60 percent against the U.S. dollar this year and, in October, Indonesia sought financial help from the International Monetary Fund (IMF).
Soedradjad said increased competition had driven more banks to get involved in certain high-risk activities, including exposure to the property sector, which was sensitive to economic change.
He said off-balance sheet activities, mainly those linked to derivative transactions, had also increased significantly which led to increased vulnerability in the banking sector.
"In this regard, we will continue to encourage banks to implement more effective and efficient risk management controls and systems," Soedradjad said.
Therefore, intensification of financial reform was necessary, especially to minimize the short-term impact of the closure of the 16 private banks.
While the closure of the banks would strengthen the banking industry in the medium and long term, the measure had produced an immediate "shock wave across the economy", Soedradjad said.
"The bank closure has given rise to two other flights currently going on: a flight to currency, which we think will be temporary, and a flight to quality, which we think will last a little longer," he said.
Meanwhile, the tight monetary policy has caused difficulties for banks managing their liquidity, prompting them to resort to using their reserves.
"The banking system is in distress beyond what we expected at the time when we formulated the restructuring program," Soedradjad said.
"In this regard, our policy attempts to strike a balance between the objective of supporting the confidence of the rupiah and that of avoiding stagnation in economic activity and undue distress in the banking sector," he said.
He also said financial deregulation and integration had complicated monetary management and brought about a changing paradigm in conducting monetary policies in Indonesia.
"We are now searching for an appropriate mechanism for monetary management, especially after the implementation of a free-floating exchange system," Soedradjad said.
The monetary policy was inextricably linked to other policies at the micro-level, affecting the operations of individual banks, he said.
An inappropriate monetary policy could disrupt macroeconomic stability, which in turn could cause a deterioration in bank soundness.
Equally, he said, a weak, vulnerable and badly managed banking sector could also undermine the effectiveness of the monetary policy and place the entire economy in jeopardy. (das/rid)