. in this respect, unwinding the central bank ’ s elevated balance sheet amidst slowly adjusted potential output, will always be economically difficult and politically complicated. of course, there are several options to take, e. g. whether utilize either reverse repo, issuing central bank bill, or start to explicitly declare medium to longer term inflation target. but different consequences may arise from the way those factors are decided and implemented. to begin with, it is important to distinguish between the long term risk and the short term consequences. as i pointed out earlier, the extent to which exit strategies take place is not an easy issue and involving vast complexities as these strategies will always be contradicted with the pace of the recovery itself. problems exist when the perceptions about the exit builds up and feeds up the tail risk where market players are irrationally exuberant in responding the way the recovery runs. first, the perception that the authorities in advanced economies, mainly the fed, will maintain their loosening stance in an extended period has become a sort of long - run certainty. second, the perception that market mechanism will efficiently make automatic correction against shortrun dynamics. as a result, risky asset prices have risen too much, too soon, and too fast compared with macroeconomic fundamental. simply to say, asset price bubbles fueled by this too enthusiastic retort is and will always be our main short - run implication of the speculation builds up around the exit strategy issues. the implications and policy dilemma the impact of major economies ’ exit policy to emeap countries will depend on the degree of openness of a country from the point of view of both trade and financial account. in indonesia, for instance, this financial account channel has become substantial as short term cross border flows has been sizable in domestic financial market. in addition to economic openness of a country, two other aspects that should be taken into account are economic characteristic and policy regime being implemented. in terms of the latent economic characteristics, the nature of the role of each economic sector to gdp, the level of exchange rate pass - through, the role of expectation in inflation formation which would provide unique level of shock absorber specific for each country from global shock. nonetheless, i do believe that the emeap economies are facing similar immediate problem, i. e. how best manage the increasing volatile short - term capital flows stemming from asymmetry in economic recovery between advanced vis - a - vis emerging economies and the policy responses that go with it. thus,

in 2005. the picture is that an industry putting its house in order and striving for growth must first be sterilized of potential systemic risk that could arise from problems at individual banks. before the recent launching of the api, bank indonesia put together a range of scenarios for the consolidation program for the building of soundness and strengthening of the banking industry as a whole. these scenarios are : • market driven consolidation • directives consolidation • heavy - handed consolidation these scenarios are in essence of a sequence of action programs that are mutually complementary, should one of the scenarios earlier in the sequence prove ineffective and fail to deliver the desired results. taking into account the developments that have taken place since the introduction of the api in early 2004, bank indonesia is now readying itself to apply the second scenario in the consolidation program, which in essence is an acceleration of the consolidation program scenario set out in the api. the consolidation scenario that we are considering for implementation in 2005 will begin with a process of identifying the medium and large banks that are currently in very sound shape and have adequate human resources to expand market share without sacrificing prudential banking principles. our expectation is that these will become the anchor banks capable of stimulating a process of strengthening among other banks whose future ability to compete is reportedly constrained by a range of factors. in conjunction with the process of determining these anchor banks, bank indonesia will also identify the banks that have or are thought to have lost competitiveness because of their inability to build stronger resources and especially capital. these banks will then be grouped with other banks in reasonably good condition but which lack competitiveness because of limited market share and are experiencing downward trends in both assets and deposit funds. each group of banks will be offered 3 options : first, acquisition by an anchor bank ; second, merger with other banks in the group ; and third, a combination of merger between a number of banks and an anchor bank. ladies and gentlemen, in addition to accelerating bank consolidation programs, banking policy directions include other measures, namely : second, reorientation of the working mechanisms and procedures of the national banking industry to more effectively accommodate the needs of the national economy ; parallel with the process of institutional consolidations, banks are also required to revitalize their mode of operation. the process of allocating funds that is practiced by banks have been so far relatively passive. decisions are not based on accurate research information concerning the sectors they are financing. in the years ahead, banks must be able to identified more clearly