Closing Remarks The Seacen Bank Indonesia High Level Seminar for Deputy Governor Bali 9 10 December 2010

Transcription

1 BANK INDONESIA Closing Remarks The Seacen Bank Indonesia High Level Seminar for Deputy Governor Bali 9 10 December 2010 Ladies and Gentlemen, I would like to begin by firstly congratulating all speakers and participants for their excellent presentations and fruitful discussions during this first SEACEN High Level Seminar on financial stability, held in such magnificent settings. I am confident that this constructive exchange of views, ideas and experience among central bankers, academicians and other invitees has given important insight on the role that central banks and financial authorities can play in safeguarding financial stablity, which will be valuable input for policy makers in bolstering the nascent economic recovery and ensure its sustainability in the long run. Ladies and Gentlemen: Now that we have come to the conclusion of the seminar, allow me to close with several salient points and comments made by the distinguished speakers at this forum. In his welcome remark, Dr. A.G. Karunasena spoke about the importance for central bank to focus on financial stability as well as monetary stability in order to achieve the ultimate macroeconomic goal of growth and stability. The increasing number of financial crises triggered by banking crisis, reopened the debate on roles and objectives of the central bank. Although there is a potential trade off between price stability and financial stability, particularly in the short term, the proper balance between those two is important to be properly maintained. Dr. Karunasena also argues that increasing frequency and size of financial crises have clearly indicated that micro prudential supervision alone is not sufficient and it has to be complemented with macro prudential supervision. Although the awareness in maintaining financial stability has been developed for a while, we are still facing one important challenge; that is how financial stability could be defined in a tangible, measurable, and communicable way. The remarks made by Dr. Muliaman Hadad on behalf of Governor Darmin Nasution referred to the importance of financial system reform and the need for global collaborative effort. Recent global crisis has caused a strong wind of change in the way we view financial system supervision, especially within the context of financial stability. From the crisis we learn that microprudential supervision alone is insufficient and has to be coupled with macroprudential surveillance and early warning system of systemic risks. The remark also elaborated how the SEACEN region managed to sail through the heavy waves of global financial turmoil with such a promising ground, not on the basis of luck, but through a painful experience and drastic reform in the financial system. In addition, though it is not easy to gain common understanding and coordination on policies among countries, global respond and collaborative effort is much needed in resolving and preventing crisis. Realizing this, the G 20 have responded by strengthening their efforts to deliver reform to the global financial

2 architecture. It is for our region to discuss deeply about the new initiatives endorsed by the G 20 that may well affect our financial system. [Keynote Speech] A keynote speech by Dr. Charles Goodhart follows, emphasizing on the emerging new architecture of financial regulation. He mentioned that the momentum of financial regulatory reform took place in the aftermath of the autumn 2008 global crisis. Much has been happening ever since although little seems to have been finally agreed, most recently being the Dodd Frank Act in the US and the deliberations of Basel III. Regulation itself, he added, came under the background of three main reasons, namely to address the control of monopoly power, to apply consumer protection and to counter externalities. The moral is that regulation should not be to make financial institutions behave better so long as the cost of bad behavior is internalized. Dr. Goodhart further underscored that the main thrust of the work done to improve financial regulation comes under the headlines of crisis prevention and crisis resolution. He explained that for crisis prevention, one of the forms that the regulation may take is revised and enhanced ratio controls, such as those liquidity and capital ratios under the Basel standard. However, one of the main deficiencies in this approach is the inability to design a gradual ladder of sanctions. One way to get around this is through taxation that will influence the behavior of banks and thus the systemic stability of the banking system. Moreover, financial regulation may also consist of direct constraints or allowable financial practices, remuneration, and reform of market structures and CRAs. On crisis resolution, he underlined that the resolution costs should be shifted from taxpayers to the banking system itself. In this regard, ex ante and ex post taxes can be imposed. Both have different implication though, in which ex post tax is procyclical as it taxes the good guys in the aftermath of crisis. Ex ante tax on the other hand, can shift bankers behaviour in the desireable direction. [Session 1] In his presentation on Vulnerabilities in the Past, Present and Future: How should policy makers respond, Dr. Kenneth Kuttner underscored a number of challenges, including how to deal with the rising risky assets of non banks which had fueled the recent global crisis, and how surveillance can keep up with the growing vulnerabilities. He further explained two sets of tools that policy makers should be focused on, i.e. regulatory and monetary tools. On the regulatory side, emphasis should be placed on measures to minimize fragility, including through liquidity and capital requirements. However, concern should be placed on the scope of these regulations which is thus far mainly for banks and had left the unregulated financial institutions into trouble. Meanwhile, the monetary policy should place financial stability as one of its goals. However, the effectiveness of monetary tools either through bank lending channel or interest rate channel is still arguable. Dr. Kuttner concluded that there are no magic bullets, in the sense that each policy respond has their own challenge, be it asymmetric information problem in surveillance, risk of shadow banking system despite the stipulation of capital requirement, or the questionable efficacy of monetary policy. [Session 2]

3 In his presentation on The Optimal Banking Capital and Liquidity Policy for Financial Stability, Dr. Alistair Milne mentions there are some planned agendas in order to achieve optimal banking capital and liquidity. In Basel III, banks can increase capital through some measures, such as risk weightings for trading book, focus on core equity, conservation buffer, and optional countercyclical buffer. Dr. Milne explains that it is not easy for banking industry to reach capital requirements because the heterogeneity of the individual financial institutions. In the concept of Basel III capital buffer, the significant change is focusing on common equity. Banks can increase their capital ratios by shifting their debt to equity by using their money and buyback bond. This effort will minimize the cost in order to raise higher capital ratios. In his presentation, Dr. Milne also explains that LCR (liquidity coverage ratio) and NSFR (net stable funding ratio) have little impact for emerging market banks because these banks have proportionally greater customer deposits than loans. In the end of presentation, Dr. Milne delivered that limitation of short term funding through taxes on short term capital inflows, is needed to address some liquidity issues. [Session 3] In his presentation on Banking Behavior in the midst of Financial Reform, Dr. Takatoshi Ito focuses on regulatory reform in banking sector which has five categories of reform directions. They are buffer of solvency, liquidity maintenance, better crisis management, treatment of SIFIs, and orderly resolution mechanism. In order to maintain buffer of solvency, banks should increase the capital ratio buffer and make a direct regulation on its activities. In maintaining liquidity, bank can use two ratios: Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR), as better measurements for liquidity. Dr. Ito also emphasizes that better crisis management framework should be developed. Although there are many options that can be used within the crisis management framework, such as bank tax, special levies, and central bank liquidity, the mechanism still need to be formulated. Related to the treatment for SIFIs, Dr. Ito argues the need to have international coordination to develop global supervision to monitor global SIFI. In the meantime, orderly resolution mechanism is deemed important as well. This mechanism will allow the failing of an institution for the sake of lowering moral hazard in SIFIs. This involves harmonizing the international bancruptcy law. [Session 4] Dr. Tarisa Watanagase and Mr. Nestor Espenilla Jr. shared their experience and view in Managing Cross Border Emerging Vulnerabilities and Crises: Challenges and Crisis. Dr. Tarissa Watanagase shared the experience of Thailand in confronting the challenges of the recent financial crisis and lessons that can be drawn. In response to crisis, Thailand conducted aggressive rate cuts and fiscal stimulus, launched SME credit program and performed capital injection to specialized financial institutions. No less important is frequent dialogue with banks. In addition, financial institutions proactively worked closely with debtors with potential problems. Dr. Watanagase further pointed out some lessons learned. It is evident that loose monetary condition over long period leads to bubbles and crises, therefore central banks must take away the punch bowl whenever needed. In addition central bank mandates must include both monetary and financial stability. Monetary policy in particular reduces financial burden but ineffective to stimulate demand during crisis if financial sectors is impaired. She also underscored that monetary and fiscal discipline give policy room when needed and EWS has limitation both before and after when the crisis is imported. The challenge is how to strike a balance between rule based and discretionary monetary policy. The ideal would be having a set of guiding principles with some discretion at hand. Regional and international cooperation is also needed to address issues of management of capital flows,

4 volatilities and potential bubbles. No less important is also to promote risk awareness and risk management both of supervisors and financial institutions. In his presentation, Mr. Nestor Espenilla, Jr. discusses about the characteristic or nature of banking sector. Banking industry in Philippines is resilience during the period of financial global crisis. Some banks data showed for a decade support the well condition of bank in Philippines. However, reinforced by the crises, Mr. Espenilla argues that liquidity becomes the key issues because it is central to what banks do and it has micro and macro facets. Banks faces some challenges due to market dynamic and stakeholder s expectation, among others better management of liquidity, better analysis of risk and stonger role of bank supervisors in financial stability. He also stressed that in managing the cross border vulnerabilities, financial stability, microprudential and macroprudential should be well defined. Both panelists strongly suggest that central bank s mandate must not only include monetary stability but also financial stability. Furthermore, people from monetary department and banking supervisory department have to work closely to produce better policies. [Session 5] Dr. Goodhart claims that no other institution is capable of taking the role since the central bank has the technical ability to do it. Dr. Kuttner mentions the possible obstacles in fragmented regulation with the presence of several regulatory bodies, the availability of the best resources for the central bank, the availability of high quality information, the difficulties in deploying a good set of methods to measure systemic risks, and the fact that the close relationship between regulators and regulatees may complicate the role of systemic regulator of the central banks. Dr. Milne focuses on the definition of systemic financial risk which is risk that can emerge from the payment system, mismatch in liquidity, common exposure or concentration risk, hidden counterparty risk. He poses another question whether the central bank be the sole systemic regulator, however agrees that the central bank should be one of the institutions taking the role. Dr. Ito provides the pros and cons. The pros: the central bank has the lender of the last resort function, the macroprudential surveillance is also part of the central bank s responsibility, and the central bank has the best human resources. The cons: the monetary policy can be compromised for financial supervisory reason, the need to have more tools for the central bank in order to do the role and these tools may not fit the central bank practices, and central bank can be blamed if its decision to mitigate systemic risks is unpopular. Dr. Ito prefers to have the central bank and financial supervisory body, although the two institutions may be within the same authority, hold the role of systemic regulator. Dr. Hadad provides the reasons for the central bank to do the systemic regulator role. They are to prevent the system form any unnecessary challenge to the financial stability that will hinder monetary policy to work properly and the fact that crises put a heavy burden to central banks in terms of extended balance sheets. He mentions the pre requisites for the central bank to have the role are institutional readiness, instrument and resources availability, coordination with other economic policies, and greater accountability, transparency and the political approval. Mr. Wong focuses on the practical challenges for doing the role. First, there is a risk of having suboptimal policy because of the conflicts between price and financial stability. Second, the design of the policy would be more complex. And third, a broader set of tools is needed. He also argues that the diversity of the global financial system also makes the role fo systemic regulator more challenging.

5 Ladies and Gentlemen: Overall, it was widely covered in the discussion about the need for the financial reform to go beyond the banking system. As mentioned by Dr. Milne, liquidity issue does not only belong to banking sector but also to non bank financial institutions and firms that could have potential problem to financial system instability. In this regard, Dr. Ito also reminded us that in the recent crisis some governments had liquidity interventions and bail out for non bank financial institutions and to companies that have systemic risks. This situation has convinced us that we greatly need a body that serves as a systemic regulator, i.e. one that supervises banks, non bank financial institutions and firms in order to prevent the next crises. For that reason thats why we need a body that can gather all information not only from the macro economics side but also from the micro prudential point of view. In general, although there are many challenges, our panelists agree that the central bank should do the systemic regulator role. Whether the central bank will a sole systemic regulator is still debateable. I believe these past two days, we have taken another step to the right direction. Ladies and gentlemen; Finally, to conclude my remarks, I would like to thank the SEACEN Center for their close cooperation in organizing this seminar. Also I would like to extend my heartfelt appreciation to the organizing committee both at SEACEN and BI, and all support staff who have ensured the success of the seminar. It is my sincere belief that this forum can set fine standard for the next SEACEN seminars on financial stability. I bid farewell to those of you who must get on the next plane to your respective homes, but also welcome those of you who might have some time to enjoy Bali and its culture a bit longer. Thank you, have a nice lunch and I wish you a pleasant day.