INDONESIA'S BANKING CRISIS:

WHAT HAPPENED AND WHAT DID

WE LEARN?

Presented by:
Group III
Members:
Gebrie Dwi Irhamna

( 0910514020)

Fanny Oktivia Denovis

( 0910514021)

Fitrah Hayati

( 0910514024)

LECTURER : Prof. Dr. Sjafrizal

INTRODUCTION
The economic crisis that engulfed Indonesia in late
1997,brought to an end 30 years of uninterrupted
economic growth.
The banking crisis,which in part was driven by and in part
drove broader economic and political developments.
The political transaction seemed to have been completed
with the inauguration of the nwe government under
Presiden Abdurrahman Wahid.

THE BANKING SECTOR: 1988-1999

There are seven phases can be indentified to
develompent in the Indonesia banking system:
Phase I, 1988 to August 1997
Unbalanced Liberalisation
In October 1988 a comprehensive pack age of
deregulation measures was introduced for the
Indonesian banking system.

THE BANKING SECTOR: 1988-1999

Phase II, October-November 1997
Contained Banking Difficulties
After the unpegging of the Thai baht on 2 July 1997, the
rupiah came under severe downward.
Phase III, December 1997
Losing Control
A number of developments contributed to the turnaround,
including a further rapid deterioration of the financial
market situation in Korea.

THE BANKING SECTOR: 1988-1999

Phase IV, January-February 1998
Laying the Ground for Stabilisation
In January 1998,the rupiah went through an episode of
disastrous depreciation; during that month, the rate fell
from Rp 4.600 to Rp 14.00/$,with some trade even at Rp
17.000/$.
Phase V, March-May 1998
First Initiatives and New Shock
The ensuing three moths, the authorities take a series of
initiatives to resolve the problem of ailing bank, only to
face a major new stock.

THE BANKING SECTOR: 1988-1999

Phase VI, June-September 1998
Design of a Comprehensive Strategy
In June,the first result of the reviews, for six Large
private IBRA-controlled banks,concluded that they had
catastrophic losses hidden in their loan port-folios : 75%
of the total assets on avarage were to be declared in
theloss category

THE BANKING SECTOR: 1988-1999

Phase VI, June-September 1998
Design of a Comprehensive Strategy
In June,the first result of the reviews, for six Large
private IBRA-controlled banks,concluded that they had
catastrophic losses hidden in their loan port-folios : 75%
of the total assets on avarage were to be declared in
theloss category

SELECTED VIEWS
ON THE BANKING CRISIS
Challenges of Large-Scale Intervention
The program the Indonesian aouthorities put in place in
the months following the onset of the crisis in late
1997was aimed at restoring the viability of the financial
sector
Moral Hazard
Moral Hazard can arise in a number of forms when a
blanket guarantee is put in place

SELECTED VIEWS
ON THE BANKING CRISIS

The moral hazard seems also to have extended to the

depositors,as weak banks sought to recover lost
deposits by offering uneeonomically high interest rates.

Costs and Government

Responsibility
The government recognised that bank
restructuring,particularly when a blanket quarantee is in
place,is a government responsibility. Cost have three
main elements: compensation to BI for the liquidity
support extended to the banks, compensation to those
banks taking over the liabilities and recapitalisation of
those banks that are undercapitalised and stay open.

SELECTED VIEWS
ON THE BANKING CRISIS
Lender of Last Resort Facility
In the period after the November 1997 closings of 16
small banks, the authorities had a clear preference not to
close any more banks, given evidence of the increasing
fragility of confidence in the banking system.
For the early part of the period there may have been
oppurtunities for round tripping by banks.as the rates for
the lender of least of last resort (LOLR) facilities
remained sticky and below the rates that banks might be
able to earn from investing the funds.

SELECTED VIEWS
ON THE BANKING CRISIS
Blanket Guarantee
The issue of whether the blanket quarantee should have
been introduced earlier such as at time of the October
1997 bank closures is one of the most contentious
regarding the handling of the banking crisis.
The balnket quarantee announced on 27 January 1998
followed closely the provisions of that promulgated in
Thailand. All depositors and creaditors were to be
covered for both domestic and foreign currency claims,
although the later too would be paid in domestic
currency.

CONCLUDING REMARKS
General Assessment as of End 1999
By the end of 1999, most of the critical elements that
could protect the core banking system and facilitate the
revival of intermediation were in place
Some Core Lessons
The first lesson from the crisis is how quickly matters can
get out of hand, and an apparently well managed and
strongly performing economy be plunged into deep crisis.

CONCLUDING REMARKS
Governance Issues
Governance issues have been at the heart of the
banking crisis in Indonesia. At the onset of the crisis, the
banking sector was weak because of directed lending,
breaches of legal lending limits, and inadequate
capitalisation

SUMMARY
The economic crisis in indonesia 1997 an end 30 years
the economic growth. Economic and political
developments until 1999 to key element of the political
transaction of new governmnet.
Seven phases can be indentified development in the
Indonesian banking system from the bold but
unbalanced financial sector liberalisation in the late
1980s to the crisis of 19997 that proved necessary to
bring stability back to the banking sector.