SEACEN Bank Indonesia High Level Seminar for Deputy Governors Optimal Central Banking for Financial Stability Bali, Indonesia, 9-10 December 2010 The repercussion of the recent global financial crisis has given many lessons for central banks and other financial authorities that safeguarding financial stability is indeed a challenging endeavor. The fact that the crisis emerged from a developed country also sheds light that the establishment and maturity of the financial market does not guarantee a perfect insight to what really goes on in the market. Financial crises are able to find new forms by evolving with the developments in the financial markets. Financial authorities need to pay attentions to vulnerabilities that seem unlikely to materialize as systemic threats but relevant to consider when linkages are recognized. Globalization of the financial markets has also made the task in safeguarding the financial stability more complicated. In addition, increasing dependency of the economy to the financial system coupled with increasing complexity of the financial system as a result of financial deepening also contributed to the difficult effort to avoid financial crises. When the subprime mortgage crisis erupted in 2008, it did not look like central banks had all the right recipes to avoid the global meltdown. The governance of the financial systems around the world then became a hot topic. Financial regulations, financial authority structures, and financial stability frameworks are among the most discussed issues in multilateral fora. With so many unsettled issues in the mission of safeguarding the financial stability, central banks and other financial authorities in the world pay a lot of attentions and put hours and hours of work into efforts to strengthen financial stability framework. Monetary stability is not the only objective that central banks care about. The efforts to safeguard financial stability can sometimes be conflicting with the efforts to maintain the monetary stability. Despite the acceptance of the additional objective, central banks and other financial authorities still have a lot of questions on the best ways to play their roles in the financial systems. Financial regulatory reform and standards implementation have been amplified by the group of standard setters (e.g. FSB, BCBS, IMF, etc) with the mandate from the G20 is an inevitability that in time will have to be addressed by each jurisdiction of financial market. Each financial authority still has to define its best role and determining its best strategies in contributing to the efforts of maintaining the financial stability in its jurisdiction. The International Seminar on Financial Stability titled Optimal Central Banking for Financial Stability is an effort to highlight some of the questions that a central bank still have in defining its best role in safeguarding the financial stability. The background and the questions for each concern are addressed in the following flow of sessions. 1
Wednesday, 8 December 2010 ---- ARRIVAL ---- Day 1, Thursday, 9 December 2010 08.30 08.45 Registration 08.45 09.15 Welcome Remarks Dr. A.G. Karunasena, Executive Director, The SEACEN Center Opening Address Dr. Muliaman D. Hadad, Deputy Governor of Bank Indonesia 09.15 10.30 Keynote Address Optimal Central Banking for Financial Stability Dr. Charles Goodhart, London School of Economics The recent financial crisis has challenged central banks in delivering the best policy to relieve pressures on the financial sector. Financial reform is considered necessary to reduce the moral hazard behavior in the financial market and prevent another severe financial crisis. However, looming questions remain. What are the most important issues that central banks needs to address first and foremost? What should a central bank have in its arsenal to safeguard financial stability? What are the optimal conducts of central bank while business as usual and as vulnerabilities emerge? Are central banks capable of safeguarding the financial stability? 10.30 11.00 Photo session and coffee break 11.00 12.15 Session 1 Vulnerabilities in the past, present and future: How should policy makers respond? Dr. Kenneth Kuttner, Williams College In the wake of recent global crisis, the role of macroprudential surveillance becomes very important in central banking practices. Although we have faced several crises in the past and learned many lessons, detecting vulnerabilities in the market is still a daunting task. What have we missed in the past? With the growing concerns of the economic recovery in the U.S. and the economic fragility of Euro zone, capital flows rapidly into emerging markets. What are the going macroprudential concerns? Extreme and persistent reactions from market players toward crisis situations can induce new vulnerabilities in different parts of the world. What vulnerabilities could potentially emerge later if market players did not pay enough attentions to the implications of their current actions? How should regulators systematically design macroprudential surveillance in order to detect market vulnerabilities early enough? What is the optimal design for regional framework in response to emerging vulnerabilities that may be originated from other countries? 2
Day 1 continued 12.15 13.45 Lunch 13.45 15.00 Session 2 Optimal bank capital and liquidity policy for financial stability Dr. Alistair Milne, City University London Capital and liquidity are the main focus of policy makers in increasing bank ability to absorb risk. Banks are required to maintain stronger capital and adequate liquidity while maintaining loan extension to the real sector. Although many countries have not yet fully implemented Basel II framework, Basel III is already in the pipeline. Basel III especially addresses the additional capital requirement for SIFI. In addition, banks are also required to install countercyclical measures to prepare themselves in facing economic downturn. SIFI is required to have more cushion ex-ante crisis situation. What are the implications of stricter capital regulations to banking behavior? What is the optimal banking capital policy that can strike a balance between risk absorption and profit maximization? What are the major concerns in implementing Basel III in emerging markets? 15.00 15.15 Coffee break 15.15 16.:30 Session 3 Banking Behavior in the midst of Financial Reform Dr. Takatoshi Ito, University of Tokyo After the crisis, policy makers are now focused on how to restore the financial stability and perform financial reform. In response, banks have to operate under uncertainties of the future of banking regulations. A set of regulatory standards to curb risk taking behavior and protect customers is being discussed. Capital, liquidity, leverage, tax treatment, compensation package, countercyclical policy, cross border financial supervision, systemically important financial institutions (SIFI) are among the issues that are likely to become more strict for banks. Although intended for financial stability purposes, the changes may have adverse impact on bank s business. How do banks react to all the uncertainties and inevitably the reform in the regulatory standards? What are the implications to the supply of financing to the economy? Given all the implications, looking at it from the banking authority point of view, what is the optimal banking policy in the midst of financial regulatory reform? Is there an opportunity for coordinated efforts within regional setup to strengthen regional financial stability framework (i.e. crossborder macroprudential surveillance, supervisory college)? 19.00 21.00 Welcoming Dinner Hosted by Bank Indonesia 3
Day 2, Friday, 10 December 2010 08.30 09.00 Registration 9.00 10.30 Session 4 Managing Cross-Border Emerging Vulnerabilities and Crises: Challenges and Responses Chair: Dr. Halim Alamsyah, Deputy Governor, Bank Indonesia Speakers: Dr. Tarisa Watanagase, Former Governor, Bank of Thailand, Dr. Nestor A. Espenilla, Jr, Deputy Governor, Bangko Sentral ng Pilipinas 10.30 10.45 Coffee Break The speakers will share the following: - Experiences of conducting central banking policy in the wake of global crisis emphasizing on the challenges in mitigating the risks and stabilizing the financial system. Were early warning signals present? Are tools and instruments available to support the policy? Are there specific monetary or macroprudential or even microprudential tools that have been useful in facing the crisis? What has been the best weapon in limiting the economic downturn? What are the lessons learned? - Experience in the implementation of Basel II, installing countercyclical measures, and dealing with SIFI. What has been the most challenging effort in striking the balance between installing strict microprudential regulations and maintaining profitable banking sector? Which areas of regulations have been complained most by banks or financial institutions? What will be the approach in facing the new wave of financial regulatory reform (Basel III)? What collaborative efforts could SEACEN member banks initiate? 10.45 12.30 Panel Discussions: Can central bank be a systemic regulator? Chair: Dr. Miranda S. Goeltom, University of Indonesia (former Senior Deputy Governor of Bank Indonesia) Panelists: Dr. Charles Goodhart (London School of Economics), Dr. Kenneth Kuttner (Williams College), Dr.Alistair Milne (City University London), Dr. Takatoshi Ito (University of Tokyo), Dr. Muliaman D. Hadad (Deputy Governor, Bank Indonesia), Mr. Wong Nai Seng (Executive Director, Macroeconomic Surveillance, Monetary Authority of Singapore) The role as systemic regulator is considered the missing piece in the financial stability framework. The systemic regulator function by design should be the firm hand capable of reducing potential systemic risk emerging in the financial system. What are the necessary conditions to become a systemic regulator? What tools should a central bank have in its disposal in order to perform the systemic regulator function successfully? 4
Day 2 continued. 12.30 12.45 Closing Remarks Dr. Halim Alamsyah, Deputy Governor, Bank Indonesia 12:45 14:00 Lunch 5
SEACEN Program 14.00 15.30 Meeting Four speakers (Charles Goodhart, Kenneth Kuttner, Alistair Milne, and Takatoshi Ito) with the whole Deputy Governors Starting at 15.30 SEACEN Deputy Governors Meeting (1) Keynote Speech Darmin Nasution, Governor of Bank Indonesia (2) Cross Border Cooperation and Colleges of Supervision - Background - Views and development - Decision by member banks for proposal to BOG Chair: Mr Mestor Espenilla, Jr, Deputy Governor, Bangko Sentral ng Pilipinas (3) Formalising the annual event of SEACEN Deputy Governors Seminar Chair: A.G. Karunasena, Executive Director, The SEACEN Center 19.00 - Farewell Dinner Hosted by SEACEN Day 3, Saturday, 11 December 2010 ---POST SEMINAR PROGRAM FOR DEPUTY GOVERNORS AND SPEAKER--- (OPTIONAL) Sunday, 12 December 2010 ---DEPARTURE--- 6