until the asian crisis hit in 1997, the existing restriction on capital inflows were only applied to foreign borrowings by banks and companies with government - linked projects and net open foreign exchange position ( nop ) on banks as a prudential regulation. prior to the crisis, this system had contributed to sustained high economic growth, thereby promoting our long term development program. foreign capital inflows had also fostered the deepening of domestic financial sector by expanding market liquidity. however, the benefits of capital inflows, in particular in the early 1990s, were undermined by financial market imperfection stemming from lax regulation and supervision and moral hazard due to implicit guarantees. these problems were reflected in the inefficient allocation of capital, unhedged foreign liabilities, and inflated asset prices. as market confidence in the prospect of the economy of the emerging market in asia faltered, reversal of capital outflows could not be arrested, thereby leading to capital account crisis. with the hindsight of the asian crisis, the central bank has sought to strengthen the monitoring on the capital movement and minimize speculative transactions. to this end, in 2001 bank indonesia issued a regulation on the non - internationalization of the rupiah. subsequently, when a wave of capital reversal and speculation against the rupiah triggered by rising world oil prices heightened in 2005, we issued a series of micro policies addressing the imbalances in the demand and supply in the forex market. furthermore, prudential regulation in the banking sector was also strengthened through a tighter ruling on the nop and particular transactions in forex trading. indonesian floating exchange rate regime needless to say to fellow governors that the choice of an exchange rate system depends to a great extent on the condition of a country at a given time. in the current context of indonesia, under a free capital mobility and limited amount of international reserves, we believe that our floating exchange rate system adopted on august 14, 1997 is an optimal choice. the system, we believe, provides a built - in discipline in a market whereby all other infrastructures are not sufficiently strong. this float will in part create a break on imprudent overseas borrowing, because in doing so market participants will have to factor in the cost of possible movements of rupiah. we are fully aware that in the case of domestic financial markets with imperfections, such as the thin forex market and limited availability of hedging instruments, a floating rate system often leads to high vol

for otc derivatives. this step would complement the higher capital requirement for non - centrally cleared otc derivatives regulation issued in september 2016. 14. transforming shadow banking into resilient market - based finance. compared to other elements of the reform, internationally - wide implementation of the agreed reforms related to shadow banking remains at relative early stage. the fsb and jurisdictions are planning to conduct more work to assess and respond to potential financial stability risk in this area. 15. with regards to monitoring and regulation of non - bank financial entities ( nbfes ), the indonesian fsa is responsible to supervise these institutions. it also has the authority to pass regulations on new and existing nbfes activities. bank indonesia also performs periodic assessments of emerging non - bank financial intermediary activities from a macroprudential perspective. efforts to reduce gaps between the risk assessment framework for nbfes and the banking system are on - going. ladies and gentlemen, 16. implementation of the reforms is challenging. of importance, is ensuring that the implementation of the regulatory reforms does not impair the ongoing economic recovery process and that resilience of the banking system is preserved. 4 of 6 17. we noted several challenges need to be address. first, with regards to bcbs review of the regulatory treatment of sovereign risk. we underline the need to undertake due consideration on the important role of sovereign debt in monetary operation, the financial market and economic development financing, especially in emerging economies. a one - size - fits - all approach may not be suitable due to different sovereign instrument and financial market characteristics among regions. 18. second, revision on the standardized approach for credit risk and market risk. bcbs is working on revising the standardized approaches for credit risk and has revised the framework for market risk to enhance robustness and risk sensitivity of both framework. consequently, the standardized approach will be more granular and complex. on the other hand, indonesian banks mostly engage in traditional banking activities. hence, regulators and the industry will need to adjust their skills and information system accordingly. 19. last but not least, as a number of regulatory reforms are finalized, member jurisdictions including indonesia are expected to implement these reforms expeditiously according to the commited time line. given limited resources, authorities will need to strengthen coordination to ensure full and timely implementation. ladies and gentlemen, 20. i have no doubt the 12th asia - pacific high level meeting on banking supervision will be fruitful as we have an excellent line of speakers,