erwin riyanto : unveiling macroprudential policy speech by mr erwin riyanto, deputy governor of bank indonesia, at the 10th international conference on bulletin of monetary economics and banking and book launch, jakarta, 8 august 2016. * * * honorable, governor of bank indonesia bapak agus martowardojo former governors of bank indonesia bapak rachmat saleh bapak arifin m siregar bapak adrianus mooy bapak syahril sabirin bapak burhanuddin abdullah chairman of indonesia deposit insurance corporation bapak halim alamsyah directorate general of culture ministry of education and culture bapak hilmar farid head of fiscal policy agency, ministry of finance of the republic of indonesia bapak suahasil nazara head of national library of the republic of indonesia bapak muhammad syarif bando head of national archives of the republic of indonesia mustari irawan former bank indonesia board members distinguished guests, ladies and gentlemen assalamu ’ alaikum wr. wb, introduction – greeting & objectives 1. it is a great honor for me to be here in this 10th international conference and book launch event. please allow me to divert your attention to review the next book entitled “ mengupas kebijakan makroprudensial ” or “ unveiling macroprudential policy ”. this book i believe is not just any other book. it is the first book ever published about macroprudential policy in indonesia. it is one that is meant to educate the public with a better understanding of what is macroprudential policy, why is it important, what are the policy instruments, how it interacts with other policies and who should better have the mandate. 2. since work in the macroprudential field has only gained momentum globally following the 2008 crisis, much of the concepts are still evolving. in this book, we will come across many new financial terminologies that in principle have already been around for some time but have not yet explored. to name a few of the new terminologies are systemic risk, contagion, interconnectedness, shocks, vulnerabilities, idiosyncratic vs cross - sectional risk dimensions and macroprudential. while macroprudential policy and the aforementioned terminologies are more understood by those directly involved in the field, there is a growing need to familiarize the notion to

in the banks ’ portfolios. for our economy to recover, we had to create a strongly capitalized and well managed banking sector in line with international standards. this is our objective. to reach it we have first to address the current situation ; that is very low capital base and excessive number of institutions which have not been able to institute the necessary reforms and improvements to their financial conditions, management and operational systems. clearly, the banking sector has been one of the most seriously affected segments of the economy during the crisis. the effects were transmitted primarily through the following ways. ( i ) the sharp depreciation of the rupiah suddenly blew up the rupiah value of banks ’ liabilities denominated in foreign currencies and put the banks with short position in serious problems ; ( ii ) the economic crisis put banks ’ customers ( debtors ) in problems which depressed the value of banks ’ assets ; and ( iii ) the tight monetary policy to stabilize inflation and exchange rates, and the concomitant high interest rates, resulted in negative spreads for the banks. all the factors i cited earlier imply depletions of banks ’ capital base. and the longer the problems remain, the sharper the depletion of banks ’ capital will be. indeed, the results of the due diligence being run on the banks in 1998 show how deep the impact of the crisis on the banking sector has been. we fully realize that : ( a ) the recapitalization program is likely to be costly ; ( b ) the recovery of the economy relies upon the recovery of the banking system, and thus on the recapitalization program ; and ( c ) the failure of the recapitalization program would amount to the very costly delays to economic recovery ; then the recapitalization program would have to be designed and implemented very carefully to assure its success. it is for this purpose that our bank recapitalization program carries the following characteristics. ( i ) the estimates of recapitalization needs are done very realistically, or even conservatively through the due diligence process conducted by international auditing firms on each and every bank. the conservativeness of the estimate would provide some cushion to the changing environment during the process of recapitalization. ( ii ) the criteria for the banks to be eligible to participate in the government - supported recapitalization program are made very clear and transparent. ( iii ) the process of eligibility evaluation is conducted by four