operational risk. fourth, implementation of deposit insurance scheme requires banks to strengthen market confidence as i elaborated earlier, public confidence in the national banking industry at this time is not fully based on objective considerations. for the public, the government blanket guarantee is a dominant factor in determining their opinion and confidence toward the banking system. this condition cannot be allowed to persist. beginning in 2005, the government blanket guarantee will be phased out and replaced by the deposit insurance agency ( lps ). this changeover will place added responsibility on the banking industry to build and maintain public confidence. without a high level of confidence, the public will quickly move funds from the less trusted banks to sounder banks with stronger capital resources. to prevent this unhelpful phenomenon, the banking industry must be capable of proving that it exists as a secure, sound industry. in order to adequately functional in this environment, going forward banks soundness would be determined not only by its quantitative prudential indicators, but will be much wider to include a more qualitative assessment. banks must be able to show their ability to strive in situation of fierce competition. in doing this, must be managed by professionals with high integrity who are able to govern between prudence and the management of risks on the one hand, and aggressiveness and creativity in developing new opportunities on the other hand. all transactions must be conducted quickly, promptly, and accurately by means of an extensive office network with optimum utilization of information technology. banks ability to implement modernization and to adopt best 6 / 12 practices must become a distinct feature of strategic management that has selling value and can always be transparently monitored by the public. conversely, banks that are unable to meet the expectation and aspiration of the public as described above would inevitably be abandoned by its customers. failure to anticipate this means that the banks concerned will inexorably find difficulty in keeping up with normal business, suffer substantial loss or even deteriorating its soundness to the level that may endanger its existence. fifth, the banking industry is constantly challenged by competition from non - bank products, such as mutual funds, bonds, and insurance as i have mentioned in our bankers ’ dinner last year, banks in 2004 would face an increasingly tight competition both among each other and competition arising from other financial institutions. if we compare the banking and non - banking industries, it is obvious that growth in non - bank instruments such as mutual funds has outpaced growth in bank products. last year, the level of banks deposit

##ilience and stability of the banking system and promote better risk management practices. in practice, the application of basel ii framework calls for thorough preparations by bank indonesia, the banking industry, and other stakeholders. the scale of comprehensive preparations encompasses effective risk management practices, competent human resources, adequate information technology and databases, and other supporting infrastructure such as accounting standards based on international accounting standards ( ias ) and credible rating agencies. in view of the scope of all that we will be required to do, it is clear that we face an array of daunting tasks. to this end, over the next 3 years bank indonesia will work on the development and implementation of action plans so that each of the crucial agenda that must be undertaken by us all, including bank indonesia, the banking system, and other stakeholders, will be focused and directed towards efforts to comply with all the criteria and conditions required under basel ii. then, having put into place all the prerequisite conditions, we can look forward to having a banking industry at the end of 2010 that will be fully capable of applying best practices and most importantly basel ii. in this process, bank indonesia will strive to play a proactive role that is nevertheless proportionate to our mandate. we are strongly committed to continued facilitation of the various needs of the national banking system in response to the problems and challenges that we face in the future. we will keep working to synchronize our banking sector programs with the process of building the resilience and competitiveness of the business sector. our studies and research will be guided to respond effectively to various problems and challenges. we will make further improvements to the quality of the regulatory framework so that the dynamics of the banking industry will keep moving on the desired course. our supervisory actions will be more proactive to prevent problems, but will also be given stronger teeth to deal with problems that arise in order to safeguard the resilience and stability of the system. vii. summary and conclusion we are of course aware of the limitations in undertaking the challenging tasks i have described this evening. that is we in bank indonesia are grateful for the support that we have enjoyed from many parties. indeed, a strong and healthy banking industry is an objective that concerns not only the monetary authority. this aspiration is also shared by the general public, investors and owners and managers of banks. therefore, ultimately a healthy, strong and proactive banking system is in the interest of all in the society. the various actions, policies,