𝐂𝐡𝐚𝐩𝐭𝐞𝐫 𝐈: 𝐊𝐨𝐧𝐬𝐞𝐩 𝐒𝐭𝐚𝐛𝐢𝐥𝐢𝐭𝐚𝐬 𝐒𝐢𝐬𝐭𝐞𝐦 𝐊𝐞𝐮𝐚𝐧𝐠𝐚𝐧 (𝐒𝐒𝐊) 𝐝𝐚𝐧 𝐊𝐞𝐛𝐢𝐣𝐚𝐤𝐚𝐧 𝐌𝐚𝐤𝐫𝐨𝐩𝐫𝐮𝐝𝐞𝐧𝐬𝐢𝐚𝐥.

Summary

In this presentation, Yudha Agung from Bank Indonesia discusses macroprudential policy and financial system stability in Indonesia. He explains the concept of Financial System Stability (SSK) and its relationship with macroprudential policy, which aims to maintain overall financial stability. The talk also covers the role of macroprudential tools in counteracting pro-cyclical behaviors, preventing systemic risk, and managing interconnectedness in financial institutions. Emphasizing the importance of coordination and strong individual financial entities, Yudha highlights the evolution of macroprudential policy in response to global financial crises, aiming to safeguard Indonesia's financial system from shocks and excessive risk-taking.

Takeaways

• 😀 The concept of financial system stability (SSK) is explained as the ability of the financial system to withstand shocks while effectively performing its intermediation and financial services roles.
• 😀 The role of macroprudential policy is to ensure the stability of the financial system as a whole, whereas microprudential policy focuses on the health of individual financial institutions.
• 😀 The need for macroprudential policy emerged after the global financial crisis, as it became clear that monetary and microprudential policies alone were not enough to maintain financial stability.
• 😀 The global financial crisis highlighted the dangers of excessive optimism and procyclical behavior in financial markets, which can lead to systemic risk.
• 😀 Procyclical behavior in financial markets means that during economic booms, financial actors tend to take excessive risks, while during downturns, they become overly cautious, worsening the economic situation.
• 😀 Macroprudential policies aim to mitigate these procyclical effects by implementing counter-cyclical measures, such as tightening credit growth during boom periods and easing during busts.
• 😀 The financial system's risk can come from two sources: time-series (procyclicality) and cross-section (interconnectedness of financial institutions).
• 😀 Time-series risks refer to the tendency of financial actors to over-optimistically lend during economic booms and excessively retract credit during downturns.
• 😀 Cross-sectional risks arise when systemic financial institutions fail, impacting other institutions or sectors that are interconnected within the financial system, leading to broader systemic risks.
• 😀 Macroprudential policies help manage systemic risk by preventing overexposure to single sectors and ensuring that institutions are resilient to shocks, maintaining overall financial stability.

Q & A

What is the primary focus of macroprudential policy?

Macroprudential policy focuses on maintaining the stability of the financial system as a whole, addressing systemic risks and preventing excessive fluctuations that could harm the economy, rather than focusing on individual financial institutions.

What is the difference between microprudential and macroprudential policies?

Microprudential policy focuses on the health and stability of individual financial institutions, like banks. In contrast, macroprudential policy aims to maintain the overall stability of the financial system, addressing risks that affect the system as a whole.

What role does macroprudential policy play in preventing economic instability?

Macroprudential policy acts countercyclically, mitigating excessive optimism or pessimism in the market by regulating credit growth, asset prices, and other systemic risks to ensure the financial system can withstand economic shocks.

How did the global financial crisis highlight the need for macroprudential policies?

The global financial crisis showed that monetary policy and microprudential regulations were insufficient to prevent systemic risks, as economic growth, low inflation, and healthy financial institutions did not guarantee financial stability. Macroprudential policies were introduced to address this gap.

Why is it important to regulate credit growth and asset prices in maintaining financial stability?

Regulating credit growth and asset prices helps prevent bubbles and overexuberance during periods of economic expansion, which can lead to instability when the economy contracts. Macroprudential tools like credit growth limits and loan-to-value ratios are used to manage these risks.

What are the sources of systemic risk in the financial system?

Systemic risk can arise from two key dimensions: time-series risk, where financial activities follow economic growth cycles, and cross-sectional risk, which occurs when interconnectedness among institutions leads to widespread failure if one institution collapses.

What does 'proscyclicality' mean in the context of the financial system?

Proscyclicality refers to the tendency of financial actors to become overly optimistic during periods of economic expansion, leading to excessive risk-taking, and overly pessimistic during downturns, leading to reduced credit availability and economic contraction.

How does the Bank of Indonesia use macroprudential policies to counteract proscyclicality?

The Bank of Indonesia uses countercyclical policies, such as tightening lending standards during periods of excessive credit growth or rising asset prices, to prevent the financial system from becoming overheated and vulnerable to sudden shocks.

What is the significance of 'cross-sectional' risk in financial stability?

Cross-sectional risk arises when institutions or sectors become overly exposed to similar risks, such as when multiple banks lend to the same industry. A collapse in that sector can lead to widespread failure across the financial system, making this a critical focus for macroprudential policy.

How can macroprudential policy address risks from interconnectedness among financial institutions?

Macroprudential policy addresses risks from interconnectedness by ensuring that institutions deemed 'systemically important' have sufficient capital buffers and are subject to regulations that prevent them from failing in ways that could trigger broader financial instability.