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What is financial system stability​

Financial system stability is a condition that allows the national financial system to function effectively and efficiently, while maintaining resilience to internal and external vulnerabilities, thus the allocation of funding or financing sources can contribute to national economic growth and stability.

As the central bank, a key policy objective of Bank Indonesia is maintaining financial system stability in order to support economic stability, which is also linked to the function of Bank Indonesia as Lender of Last Resort (LoLR), namely the authority that acts as the provider of liquidity during a crisis situation.

On the other hand, Bank Indonesia is also the authority with monetary and payment system mandates.  Shocks in the monetary sector can disrupt financial system stability and vice versa.  A payment system in trouble will ultimately trigger financial system instability, while financial system shocks can impede payment system availability.  Such interlinkages drive Bank Indonesia towards consistently maintaining financial system stability in Indonesia.

In the implementation of its mandate and authority to maintain financial system stability, Bank Indonesia is bound by several laws and regulations as follows:
  1. Act No. 21 of 2011 concerning the Financial Services Authority (OJK)
  2. Act No. 9 of 2016 concerning the Prevention and Resolution of Financial System Crises
  3. Bank Indonesia Regulation (PBI) No. 16/11/PBI/2014 concerning Macroprudential Regulation and Supervision
In accordance with those prevailing laws and regulations, Bank Indonesia is mandated to perform macroprudential regulation and supervision of the financial system, encompassing financial institutions, non-financial corporations, households, financial markets and financial infrastructure, which interact mutually in terms of funding and/or financing economic growth.

The results of financial system assessments, Bank Indonesia's policy response as well as the financial system stability outlook are regularly published in the Financial Stability Review​.

Macroprudential Policy

Macroprudential policy aims to maintain overall financial system stability by mitigating systemic risk.  Systemic risk is potential instability caused by contagion in part or all of the financial system due to interactions in terms of business size, complexity, interconnectedness and procyclicality.

Experience has shown that monetary stability and microprudential soundness alone are insufficient to prevent a crisis, considering that the 2008 crisis occurred during stable macroeconomic conditions.  Monetary policy tends not to capture signals indicating a build-up of risk induced by risk-taking behaviour amongst elements of the financial system, for instance a simultaneous increase of mortgage loans in the banking industry.

Meanwhile, macroprudential policy, which focuses on the soundness of individual institutions, is also insufficient by itself to detect the intertemporal accumulation of risk.  Therefore, a policy mix is required where macroprudential policy complements monetary policy, macroprudential policy and fiscal policy in order to maintain financial system stability.​

Macroprudential Supervision​

Bank Indonesia conducts macroprudential supervision through financial system surveillance as well as inspections of banks and other institutions with interconnectedness to banks as required.  Surveillance begins with monitoring financial system developments to the identification, analysis and evaluation of risk.  In practice, banks are required to provide and submit data and information as required and are held accountable for the accuracy of the data and information submitted​.

Macroprudential Policy Instruments

Crisis Management Protocol

Coordination between Bank Indonesia and other Authorities/Institutions

MSME Development

Financial Inclusion

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