burhanuddin abdullah : globalization, financial stability and regional cooperation keynote address by mr burhanuddin abdullah, governor of bank indonesia, at the 33rd asean banking council meeting, bali, 10 october 2003. * * * mr. secretary general, mr. chairman, distinguished officers and members of the asean banking council, honored guests, ladies and gentlemen, good morning and assalamu ’ alaikum wr. wb it is indeed a great pleasure for me to welcome all of you to this beautiful island of bali and to open this meeting today. it is also a most gratifying experience to speak before a large gathering of distinguished representatives of bankers association from the 10 asean nations. your presence here is an opportunity to further enhance cooperation among bankers to promote regional growth in a new global environment. as we all may aware, globalization is a reality and no country in the world is immune to its impact. it has opened up tremendous opportunities, but it has also posed a wide range of challenges and risks. we must therefore strive to maximize the benefits of globalization while endeavouring to minimize the costs. our experiences in the past crisis has shown that even the most dynamic economies are vulnerable. in spite of the judicious macroeconomic policies that we adopted and the structural adjustments that we carried out, the development gains that we earned over decades could crumble in the span of a few weeks. the severe crisis proved that our banking system had some structural weaknesses. those weaknesses had led most of the asean countries banking system into deep trouble, reflecting in the mounting amount of non performing loan, serious liquidity problems, huge amount of losses and eventually caused many banks to became insolvent. in the face of these realities, the asean banking industry has rightly responded to restore the solvency and the stability of the banking system, through banking restructuring program, and improvement of banking supervisory and regulatory capability. ladies and gentlemen, this crisis may be abating, but greater challenges still lie ahead. the challenges that we are going to faced, first is the heightened competition among banks that requires bankers to make the basic strategic decision. as financial modernization going forward, bankers will be forced to decide what kind of institution they want to be. bankers need to figure out where they want to be in terms of a whole spectrum of activities whether they want to be a local bank, regional, or global bank. the second is a challenge of effective risk mitigation and risk intermediation. we have to ask how do we keep

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