Securitization process a dilemma for BI

Securitization process a dilemma for BI

JAKARTA (JP): The current securitization of assets and
liabilities is putting Bank Indonesia in a delicate position,
said the central bank governor, J. Soedradjad Djiwandono.

He told a two-day Indonesian capital market forum here
yesterday that the securitization process is needed to catch up
with traditional banking activities.

"Over the last two years, we have seen an increasing
securitization of assets, a trend which may well become the wave
of the next millennium," Soedradjad told the forum, hosted by
Euromoney magazine.

As the securitization process continues, the current
development in private debt securities will probably lead to the
rapid expansion of securities products, both in money and capital
markets.

"Led by rapid progress in the capital markets, the direct
financial system now has also moved to the forefront in the
development of private debt securities such as commercial papers,
medium-term notes, bonds and asset-backed securities," he noted.

Soedradjad said that the current securitization process is
making a positive contribution to the country's development,
especially in promoting the mobilization of funds. "It gives
businesses alternative sources of finance."

At the same time, Soedradjad said, the process helps prepare
Indonesia's financial system for globalization in the financial
sector.

"The global financial system is already a reality in this
country, especially in relation to money market and capital
market activities," he said.

He said the process of asset and liability securitization,
however, has put Bank Indonesia in a very delicate position.

"We face two dilemmas. First in the process of
disintermediation... Then there will be more pressure on the
currency as well as on our monetary management capacity,"
Soedradjad said.

The process of disintermediation, caused by the rapid growth
of direct financing, will certainly lead to greater competition
in the banking system.

Prospective depositors as well as borrowers will eventually
have more deposits or financing alternatives. Prospective
borrowers can raise funds by issuing debt instruments, and
prospective depositors can invest their money in these debt
instruments.

"From history, we can see how events progressed in the United
States before World War I, when there was a clear separation
between the banking system and the capital market, just as in the
United Kingdom," Soedradjad said.

Distinction

That distinction, however, was gradually blurred by the
development of the stock market, which forced banks to get
involved in the capital market, he continued.

"History is repeating itself here, with closer relations
between the capital market and banking system. This has also
happened in Europe," Soedradjad said. "I am predicting that a
similar development will take place in Indonesia early in the new
millennium."

"The central bank has to walk cautiously between the objective
of maintaining a prudent banking system and maintaining the same
level of growth in the system," he continued.

In addition, Soedradjad said, the threat of a major pull-out
by foreign investors has put pressure on the central bank to err
on the side of caution.

"It is understandable, that other countries such as South
Korea and Taiwan are still very cautious with regards to a wider
foreign presence in their domestic stock exchanges," he said.

Despite this vulnerability to major pull-outs by foreign
investors, Indonesia will continue to open up its financial and
capital markets for foreign investors while maintaining a certain
level of prudence, Soedradjad said.

"I believe I speak for everyone in our banking system when I
say Indonesia looks forward to the next century with great
confidence," he said. (rid)