Development of Stability in the Indonesian Banking Sector Finance Essay

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This book analyses the Indonesian economy and financial sector since 1968, with special emphasis on the 1971-79 period. The study covers macro-economic developments, financial structures and monetary policies. After thoroughly analyzing the Indonesian formal financial institutions and monetary instruments to control money supply and credit, and interest rate policies, the book develops a short-run monetary model of the Indonesian economy of 1971-1979.

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2

Cases on Financial Policy and Banking Deregulation in Indonesia.

Edited by David C. Cole and Ross H. McLeod. Yogyakarta: Gadjah Mada University Press, 1991. 398p.

This book provides rigorous information on the background and the consequences of the Indonesian banking deregulation from 1983 to 1990. Part III of this book delivers specific analysis on the adjustment to policies by the Indonesian banks, including strategy issues, reorientation toward the customer, pricing issues, personnel policies, asset-liability management, and management information systems.

3

Financial Sector Deregulation: Banking Development and Monetary Policy.

Binhadi. Jakarta: Institut Bankir Indonesia, 1995. 540p.

This book documents the Indonesian experience in financial sector deregulation from 1983 to 1993. The phase-by-phase process and its effect on banking and monetary policy have been comprehensively and systematically presented. In addition, the book contains valuable information about Indonesia and the overall evolution of the Indonesian financial sector.

4

Building a Modern Financial System: The Indonesian Experience.

David C. Cole and Betty F. Slade. New York: Cambridge University Press, 1996. 379p.

This book is a standard reference work on Indonesian financial development. It provides historical scope, both comprehensive coverage and institutional depth of detail, and insightful, very balanced policy analysis and assessment of the process over the thirty years period of the New Order regime.

5

Deregulation and Development in Indonesia.

Edited by Farrukh Iqbal and William E. James. London: Praeger, 2002. 208p.

This book, consisting 13 papers, documents the Indonesian experience in implementing deregulation in financial, trade, and investment sectors. It addresses the background, ingredients and results of the deregulation, as well as outlines further reform after the financial crisis.

6

The Politics of Economic Liberalization in Indonesia.

Andrew Rosser. Surrey: Curzon Press, 2002. 232p.

This book examines the dynamics shaping the process of economic liberalization in Indonesia since the mid-1980s. It argues that economic liberalization needs to be understood in terms of the extent to which economic crises shift the balance of power and influence within society away from coalitions opposed to reform and towards those in favor of reform.

7

Indonesian Experience with Financial Sector Reform.

Donald P. Hanna. World Bank Discussion Papers, no. 237 (1994). 39p.

This paper discusses the nature of the specific reforms carried out in Indonesia during 1983-1991 period, the environment in which they were done and, most importantly their effects on the real economy.

8

Financial Policy and Financial Sector Development in Indonesia since the 1980s

Anwar Nasution. In Financial Big Bang in Asia. Edited by Masayoshi Tsurumi. Burlington: Ashgate Publishing Company, 2001, p. 191-223.

This paper analyzes the policies since the early 1980s in Indonesia to develop a modern financial industry, and comprehensively describes the evolution of the Indonesian financial system, its structural form, its mode of operation, and the types of financial instruments it offers.

9

How Financial Liberalization in Indonesia Affected Firms’ Capital Structure and Investment Decisions.

John R. Harris, Fabio Schiantarelli, and Miranda G. Siregar. The World Bank Working Paper Series, no. 997 (1992). 48p.

By employing data panel of 1981 to 1988, this paper concludes that the financial reform has had a significant impact on firms’ real and financial choices.

10

Economic Reform in Indonesia: the Transition from Resource Dependence to International Competitiveness.

Ali Wardana. The Indonesian Quarterly, vol. XXIV no. 3 (1995), p. 257-272.

This essay provides a good analysis on the results of the economic reform in Indonesia, including results on growth, employment and wages, welfare and poverty, and equity.

11

The Role of the Private Sector in Indonesia: Deregulation and Privatization.

Mari Pangestu. The Indonesian Quarterly, vol. XIX, no. 1 (1990), p. 27-51.

This essay carefully assesses a series of reforms during 1980s that was intended to reduce the role of the government sector in the economy.

12

Control and Competition: Banking Deregulation and Re-regulation in Indonesia.

Ross H. McLeod. Journal of the Asia Pacific Economy, vol. 4 no. 2 (1999), p. 258-297.

This essay analyzes the underlying forces shaping banking policy in Indonesia during 1980s and 1990s. It describes the impact of the set of truly dramatic policy changes, draws attention to the failure to achieve some important objectives and explains why some of the successful reforms had begun to be reversed in the mid-1990s, before the 1997-98 crisis brought chaos to the economy-and to the banking system in particular.

13

Reorganizing Power in Indonesia: the Politics of Oligarchy in an Age of Markets.

Richard Robison and Vedi R. Hadiz. London and New York: Routledge Curzon, 2004. 304p.

This book provide a carefully crafted and intelligent analysis of the sources of the deep and complex conflicts that have determined the trajectory of Indonesian capitalism over the last four decades (1965-2004).

14

The Politics of Economic Development in Indonesia: Contending Perspective.

Edited by Ian Chalmers and Vedi R. Hadiz. London and New York: Routledge, 1997. 269p.

This book presents and analyzes trends in economic thought in Indonesia during period of 1965-1997, namely economic nationalism, economic liberalism, and economic populism. It traces their evolution and how they have influenced policy making.

The Indonesian Financial Crisis

15

The Indonesian Economy in Crisis.

Hal Hill. Singapore: ISEAS, 1999. 153p.

This book describes and analyses Indonesian financial crisis 1997/8, against the general backdrop of economic decline in Southeast Asia. It also looks forward, considering Indonesia’s immediate policy challenges to overcome the crisis, and dwelling on some of the key lonegr-term policy challenges raised by the crisis.

16

Financial Fragility and Instability in Indonesia.

Yasuyuki Matsumoto. London and New York: Routledge, 2007. 258p.

This book examines the role of non-financial corporate overseas borrowing in causing vulnerability of the Indonesian economy, lead to the severe financial crisis in 1997/8. The accumulation of short-term, un-hedged, foreign currency loans in the non-financial corporate sector was caused by the inefficient domestic banking sector, causing interest rate differential remained high.

17

The Financial Crisis in Indonesia.

Anwar Nasution. In East Asia’s Financial Systems: Evolution and Crisis. Edited by Seiichi Masuyama, Donna Vandenbrink, and Chia Siow Yue. Tokyo and Singapore: Nomura Research Institute and ISEAS, 1999, p. 74-108.

This essay reviews the causes and impact of the currency and banking crises in Indonesia up to January 1998. It examines the macroeconomic development prior to 1997, discusses the background of the banking crisis, and analyses policy responses to the capital inflows of the early 1990s and to the present crisis.

18

Financial Sector Reform and Indonesia’s Crisis of 1997-98.

Anwar Nasution. In Financial Liberalization and the Economic Crisis in Asia. Edited by Chung H. Lee. London: Routledge Curzon and EIJS, 2003, p. 47-81.

This essay examines the financial sector reforms that had taken place since the 1980s and their possible links to the economic crisis of 1997-98.

19

Indonesia: the Long Road to Recovery.

Steven Radelet. In Global Financial Crises and Reform. Edited by B.N. Ghosh. London: Routledge, 2001, p. 129-156.

This paper examines the collapse of the Indonesian economy in 1997/8 and the most pressing economic problems inhibiting its recovery.

20

Global Markets and Financial Crises in Asia.

Haider A. Khan. New York: Palgrave Macmillan, 2004. 251p.

Chapter 3 of this book (p. 27-59) provides comprehensive analysis how financial liberalization imposed by Indonesia during 1980s and the early of 1990s contributed to the financial crisis of 1997-98.

21

Indonesia Beyond Soeharto: Polity, Economy, Society, Transition.

Edited by Donald K. Emmerson. New York: An East Gate Book, 1999. 361p.

This book provides explanation of the Indonesian financial crisis by carefully considering the historical, political, economic, social, and cultural perspectives.

22

The Indonesian Financial Crisis: from Banking Crisis to Financial Sector Reforms, 1997-2000.

Shalendra D. Sharma. Indonesia, no. 71 (2001), p. 79-110.

This essay presents analysis about the source of vulnerability and precipitating factors of the Indonesian financial crisis, and identify and evaluate the key reforms implemented in dealing with the crisis and in effort to improve the Indonesian banking sector performance.

23

Pathway through Financial Crisis: Indonesia.

Leonardo Martinez-Diaz. Global Governance, no. 12 (2006), p. 395-412.

This article examines economic policy making in Indonesia from the eve of the 1997 financial crisis to 2005 and asks whether engagement with the IMF widened or narrowed the choices available to Indonesian policymakers.

24

Indonesia’s Banking Crisis: What Happened and What Did We Learn?

Charles Enoch, Oliver Frecaut, and Arto Kovanen. Bulletin of Indonesian Economic Studies, vol. 39 no. 1 (2003), p. 75-92.

This article traces the stages of the Indonesian banking crisis of the late 1990s, and identifies governance issues of each stage. Based on that, the article concludes some lessons learned from the crisis.

The Indonesian Banking Restructuring

25

Indonesian Banking Crisis: The Anatomy of Crisis and Bank Restructuring.

I Putu Gede Ary Suta and Soebowo Musa. Jakarta: Sad Satria Bhakti, 2004. 434p.

This book provides objective assessment on the crisis and bank restructuring in Indonesia. It also draws many lessons can be learned especially from jurisdiction and accountability aspects.

26

BPPN: The End.

I Putu Gede Ary Suta and Soebowo Musa. Jakarta: Sad Satria Bhakti, 2004. 394p.

This book examines the work of BPPN-the Indonesian banking restructuring agency-in implementing banking restructuring after the severe financial crisis 1997-98. The bank restructuring program is carried out to manage the crisis with the aim to maintain/regain public confidence toward the banking system, improve the capital structure of the bank, create new regulations and laws promoting a healthy and strong banking system.

27

Bank Restructuring and Financial Institution Reform in Indonesia.

Yuri Sato. The Developing Economies, vol. XLIII no. 1 (2005), p. 91-120.

This essay addresses institutional reforms and examines the features of post-restructuring management reform at major banks. In addition, it also provides a review of major actors and the banking institution before the crisis and sheds light on the post-crisis redeployment of actors.

28

Banking collapse and Restructuring in Indonesia, 1997-2001.

George Fane and Ross H. McLeod. Cato Journal, vol. 22 no. 2 (2002), p. 277-95.

This essay overviews the Government’s bank restructuring strategy, examines its costs, and appraises the preliminary result of the restructuring.

29

Dealing with Bank System Failure: Indonesia, 1997-2003.

Ross H. McLeod. Bulletin of Indonesian Economic Studies, vol. 40 no. 1 (2004), p. 95-116.

This paper describes the collapse of the Indonesian banking system and the government’s policy response to it, under advice from IMF, including bank restructuring.

30

Performance of East Asian Banking Sectors under IMF-Supported Programs.

Luc Can and Mohamed Ariff. Journal of the Asia Pacific Economy, vol. 14 no. 1 (2009), p. 5-26.

This paper reports the performance of the banking sectors of four crisis-hit East Asian economies, under IMF-restructuring programs, over the pre- and post-restructuring periods.

31

Bank Restructuring in Indonesia.

Dara Khambata. Journal of International Banking Regulation, vol. 3 no. 1 (2001), p. 79-87.

This essay evaluates the successes and failure of bank restructuring effort in Indonesia, and offers possible measures to repair or improve the banking industry.

32

Rebuilding the Indonesian Banking Sector: Economic Analysis of Bank Consolidation and Efficiency.

Kimie Harada and Takatoshi Ito. JBICI Review, no. 12 (2005).

This essay examines the soundness of the Indonesian banking sector, particularly during and after of the government-led bank consolidation after the financial crisis. It estimates a nonparametric frontier function and analyzes efficiency with a quantitative measure.

33

Financial Sector Crisis and Restructuring: Lessons from Asia.

Carl-Johan Lindgren, Tomas Balino, Charles Enoch, Anne-Marie Gulde, Marc Quintyn and Leslie Teo. IMF Occasional Paper, no. 188 (2000). 103p.

This paper reviews the policy responses of Indonesia, South Korea, and Thailand to the Asian crisis that erupted in 1997, and compares these actions of these three countries with those of Malaysia and the Philippines, which were buffeted by the crisis.

The Indonesian Financial Reform after the Financial Crisis

34

Post-Crisis Economic Reform in Indonesia: Policy for Intervening in Ownership in Historical Perspective.

Yuri Sato. IDE Research Paper, no. 4 (2003). 46p.

This paper examines what structural changes have taken place in the banking and corporate sectors due to the reform policies in the post-crisis and post-Soeharto Indonesia.

35

Indonesia’s Crisis and Future Prospects.

Ross H. McLeod. In Asian Contagion: the Causes and Consequences of a Financial Crisis. Edited by Karl D. Jackson. Boulder: Westview Press, 1999, p. 209-240.

This essay outlines the main ingredients of microeconomic reforms and the IMF’s menus in dealing with the Indonesian financial crisis.

36

Designing an Integrated Financial Supervisory Agency: Selected Lessons and Challenges for Indonesia.

Reza Y. Siregar and William E. James. ASEAN Economic Bulletin, vol. 23 no. 1 (2006), p. 98-113.

This paper draws essential lessons from the experiences of other countries to highlight a number of key challenges facing Indonesia in designing its integrated financial sector supervisory agency, especially in the early stages.

37

Indonesia: Reforming the Institutions of Financial Governance?

Natasha Hamilton-Hart. In The Asian Financial Crisis and the Architecture of Global Finance. Edited by Gregory W. Noble and John Ravenhill. New York: Cambridge University Press, 2000, p. 108-131.

This paper addresses regulatory failure that caused the financial crisis 1997-98 and identifies reform agenda, especially institutional reform, to improve the Indonesian financial system.

38

Indonesia’s New Deposit Guarantee Law.

Ross H. McLeod. Bulletin of Indonesian Economic Studies, vol. 42 no. 1 (2006), p. 59-78.

This essay addresses the main ingredients of the Law 24/2004 on deposit guarantee. This new law allows the phasing out of the blanket guarantee introduced in 1998 in response to the economic and banking crisis, but it also allows its reinstatement in the event of a threatened collapse of the banking system.

Theoretical Issues

39

Bank Soundness and Macroeconomic Policy.

Edited by Carl-Johan Lindgren, Gillian Garcia, and Matthew I. Saal. Washington, D.C.: IMF, 1996. 215p.

This book develops a framework for bank soundness. Bank soundness is determined by operating environment and governance. Financial liberalization is expected to improve the operating environment of banking sector. Governance consists of internal governance that mainly related to ownership structure, and external governance that consists of market discipline by depositors-investors and regulatory and supervisory by the authority, usually central bank.

40

A Model of Balance of Payments Crises.

Paul Krugman. Journal of Money, Credit, and Banking, vol. 11 no. 3 (1979), p. 311-325.

This paper is widely recognized as the first-generation models of currency crises, theorizing that fundamentally inconsistent domestic policies lead an economy inexorably toward a currency crisis. This argument is supported by R.P. Flood and P.M. Garber, "Collapsing Exchange Rate Regimes: Some Linear Examples", Journal of International Economics, Vol. 29 No. 1 (1984), p. 1-13.

41

Rational and Self-Fulfilling Balance of Payments Crises.

Maurice Obsfeld. American Economic Review, vol. 76 no. 1 (1986), p. 72-81.

This paper is widely recognized as the second-generation models of currency crises, theorizing that a currency crisis can occur even when macroeconomic policies are apparently consistent with a fixed exchange rate policy. These models show how a spontaneous speculative attack on a currency can cause a crisis, even if fiscal and monetary policies are consistent.

42

Financial Restraint: Towards a New Paradigm.

Thomas Hellmann, Kevin Murdock, and Joseph Stiglitz. In The Role of Government in East Asian Economic Development, edited by M. Aoki, H. K. Kim, and M. Okuno Fujiwara. New York: Oxford University Press, 1997, p. 163-207.

This paper examines a set of financial policies, called financial restraint, that address financial market stability and growth in an initial environment of low financial deepening. Unlike with financial repression, where the government extracts rents from the private sector, financial restraint calls for the government to

43

Credit Rationing in Markets with Imperfect Information.

Joseph E. Stiglitz and Andrew Weiss. The American Economic Review, vol. 71 no. 3 (1981), p. 393-410.

This essay develops a model why is credit rationed. It shows that in equilibrium a loan market may be characterized by credit rationing. Banks making loans are concerned about the interest rate they receive on the loan, and the riskiness of the loan. However, the interest rate a bank charges may itself affect the riskiness of the pool of loans by either sorting potential borrowers (the adverse selection effect), or affecting the actions of borrowers (the incentive effect).

44

Capital Flows, Credit Transmission and the Currency Crisis in Southeast Asia.

Ramkishen S. Rajan and Iman Sugema. CIES-University of Adelaide Discussion Paper, No. 99/25 (1999). 26p.

This paper presents an analytical framework to examine the interplay between banking sector, financial liberalization, and currency crisis; and applies it to the East Asian financial crisis case. Further discussion can be found at: Graham Bird and Ramkishen S. Rajan, "Banks, Financial Liberalization, and Financial Crises in Emerging Markets", CIES-University of Adelaide Discussion Paper, No. 99/16 (1999).

45

Understanding Financial Crises: a Developing Country Perspective.

Frederick Mishkin. NBER Working Paper, no. 5600 (1996). 65p.

This paper explains the puzzle of how a developing economy can shift from a path of reasonable growth before a financial crisis, as in Mexico in 1994, to a sharp decline in economic activity after a crisis occurs. It does so by outlining an asymmetric information framework for analyzing banking and financial crises in developing countries.

46

Financial Liberalization, Prudential Supervision, and the Onset of Banking Crises.

Ilan Noy. Emerging Markets Review, no. 5 (2004), p. 341-359.

This paper examines what is perceived as one of the main culprits in the occurrence of banking crises: financial liberalization. Based on an empirical investigation of a panel-probit model using macro-economic, institutional, and political data, it concludes that an immediate impact of financial liberalization is the loss of monopoly power that destabilizes the financial industry.

47

Financial Liberalization and Financial Fragility.

Demirguc-Kunt, Asli and Enrica Detragiache. IMF Working Paper, no. 98/83 (1998). 36p.

This essay studies the empirical relationship between financial liberalization and banking crises in 53 countries during 1980-1995. The finding is that banking crises are more likely to occur in liberalized financial systems.

48

Bank Restructuring and Resolution.

Edited by David S. Hoelscher. New York: Palgrave Macmillan, 2006. 391p.

This book provides a thorough analysis on theoretical models of bank restructuring and resolution, such as benefits and cost of intervening in banking crises, bank closure options, global insolvency initiative, and options for asset management. It also presents some case-studies, including South Korea, Indonesia, Turkey and some transition economies.

49

Financial Crises, Contagion, and the Lender of Last Resort: a Reader.

Edited by Charles Goodhart and Gerhard Illing. New York: Oxford University Press, 2002. 558p.

This book assembles a selection of the best available studies in the issues of financial crises, contagion, and lender of last resort. Overall, this book provides comprehensive and authoritative coverage of the contending views on how the authorities might response to financial crises.

50

Stabilizing an Unstable Economy.

Hyman Minsky. New Haven and London: Yale University Press, 1986. 353p.

In this phenomenal book, Minsky develops Financial Instability Hypothesis (FIH), seeks to explain the endogenously fragile and unstable nature of capitalist economies by focusing on the financial structure of the economy. Like Keynes, Minsky rejects the theoretical assumption of neoclassical economics that natural forces propel the economy towards equilibrium and that government intervention is therefore unwarranted. On the contrary, he assigns an important role to big government and the lender of last resort to stabilize asset values and profitability in an environment characterized by inherent instability.

51

The Political Economy of Policy Reform.

Edited by John Williamson. Washington, D.C.: Institute for International Economics, 1994. 601p.

This book addresses these questions: what are the political conditions that make economic transformation possible? Did economic crises strengthen the hands of the reformers? Was the rapidity with which reforms were instituted crucial? Did the reformers have a "honeymoon" period in which to transform the economy? The authors answer these and other related questions, as well as providing first-hand accounts of the politically charged atmosphere surrounding reform efforts in their countries.

52

Political Economy of Policy Reform in Developing Countries.

Anne O. Krueger. Cambridge: The MIT Press, 1993. 171p.

In this book, Krueger analyzes the interaction of politics and economics in the experience with slow growth and debt crisis in terms of three major themes. The first is that politically determined policies have economic consequences that can and do change the political equilibrium that generated those policies. Second, the analysis of the political economy of economic policy determination in developed countries can only be undertaken on the basis of assumptions about the nature of government. Third, that neither economic policies nor governments can be looked at as enduring phenomena. Both the nature of the government and the economic policies can be changed according to the political and economic responses one sets off in the other, resulting in various types of "policy cycles" that need to be better understood.

53

The Political Economy of Reform.

Edited by Federico Sturzenegger and Mariano Tommasi. Cambridge: The MIT Press, 1998. 380p.

This book is organized around three basic questions: first, why do reforms take place. Second, how are reforms implemented? And third, which candidates are most likely to undertake reforms? To answer these questions, the authors propose formal models raised by the recent reform experience of many Latin American and eastern European countries. They apply common standard of analytical rigor to the study of economic and political behavior, assuming political agents to be rational and forward-looking, with expectations consistent with the properties of the underlying model.

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