BI to intensify banking sector reform: Soedradjad
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)