economic growth slowdown is more intensified by vulnerabilities in the financial sector, such as increasing credit risks and rising private external debts exposed to exchange rate risks. 8. in addition, many issues must be immediately resolved since they affect financial system stability. such issues among others are ( i ) frail domestic financial market, ( ii ) segmented interbank money market, ( iii ) increase in short term high - cost fund in the bank ’ s third party fund, and ( iv ) continued increase in property prices. distinguished ladies and gentlemen, 9. alhamdulillah, amidst global and domestic challenge dynamics, indonesia ’ s financial system stability in the second semester of 2014 could be maintained in general as supported by better financial market performance. it is in line with the increasing global financial performance and high foreign capital inflow to indonesia in 2014 reaching rp181. 5 trillion. 10. in addition, well maintained financial system condition is also supported by strong banking condition. it is among others reflected from bank ’ s capital adequacy ratio ( car ) much higher than the minimum requirements, relatively high industrial liquidity, and relatively low ratio of non - performing loans. moreover, more efficient, secure, and smooth payment system condition also contributes to the maintained financial system condition. 11. however, we must keep cautious of and observing different risks potentially arising against the financial system. we certainly do not wish to become indifferent to various achievements supporting financial resilience in 2014. 12. with the current economic and financial system characteristics of indonesia, we note sources of financial vulnerability and imbalance may result in systemic risks. such sources are apparent in at least 5 ( five ) areas. 13. first, banking procyclicality behavior following financial cycle and increase in short term high - cost fund in the bank ’ s third party fund. second, private external debt growth partially unprotected by hedging. third, continuous decrease in the world ’ s commodity prices affecting indonesia ’ s exports, which still rely on natural resources commodities. 14. fourth, continuous uncertain normalization of the fed ’ s monetary policies and better us economy resulting in stronger us dollar. fifth, continuous excessive increase in property prices resulting in intensifying credit risks and affecting inflation control efforts. distinguished ladies and gentlemen, 15. imbalance sources and their potentials to become systemic risks must be carefully anticipated and responded in an effective and synergic manner. in this case, coordination and collaboration of policies between

sector has tended to follow on from defaults and losses on domestic loans as interest rates rise and the economy slows down. but this time the downturn started in the banking sector – last summer when losses in the us property market not only led to losses in uk banks trading and treasury books but closed important sources of finance to them. the downturn in the housing market and then the wider economy followed. domestic default rates, while beginning to rise, are still low by historical standards, despite the fact that we are more than a year into the crisis. those differences reflect the most important distinguishing feature of this downturn, namely its roots in global imbalances not just in trade but in the financial system. the growth and savings in emerging economies led to an extraordinary flow of funds back to the developed world and to the us in particular. that in turn kept interest rates low, allowing the rapid growth of credit and fuelling a sharp rise in asset prices and an increasingly risky search for yield – for example in sub prime housing in the us. the impact in the uk was different but no less marked. here too the low cost of credit fuelled a spectacular expansion of bank balance sheets ( chart 3 ) and with it a growth in leverage ( chart 4 ). and, as chart 5 shows, while savings rates fell in the uk, limiting the growth of retail deposits, banks financed that lending by tapping wholesale markets. the gap between customer lending and deposits moved from zero at the turn of the century to over £700 billion in 2008 h1. much of that funding was ultimately sourced overseas. in particular, the united states acted as an intermediary, attracting capital inflows from the rest of the world and exporting these funds to other countries. road shows to investors in the us and europe ceased to be the preserve of the international giants and became common among smaller players whose whole asset base was in the uk. as the difficulties in the financial system have persisted and worsened, it has become clear that these developments have created real structural weaknesses in the banking sector. in particular : • inflated aggregate balance sheets, whose expansion had outpaced growth in the real economy ; • expansion into assets whose underlying value, credit quality and liquidity were uncertain ; • liability structures which were overly reliant on sustained availability of wholesale funding whose maturity was often short ; • capital and liquidity buffers which became too low, given these asset and liability risks ; and • underappreciated,