The Importance of FSS - Bank Sentral Republik Indonesia
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August 26, 2019
WHY IS FINANCIAL SYSTEM STABILITY IMPORTANT?
 
As a part of the economic system, the financial system allocates funds from those with a surplus to those in deficit. In an unstable financial system, allocation of funds will be inefficient, thus hindering economic growth. Experience has clearly shown that the costs of recovery from the effects of an unstable financial system are enormous, especially when instability leads to crisis.
 
Indonesia learned an expensive lesson during the financial crisis of 1998. At that time, the costs of recovery from the crisis was significant. Furthermore, it took a long time to restore public confidence in the financial system. The 1998 crisis proved that financial system stability is an extremely important aspect of building and safeguarding a sustainable economy. An unstable financial system is susceptible to shocks and turmoil that will inevitably slow down economic activity.
 
As explained, financial system instability can lead to a number of adverse conditions, among others:
  • Monetary policy will be  less effective due to poor transmission
  • Impaired intermediary function due to improper allocation of funds, thus hindering economic growth.
  • Loss of public confidence in the financial system, commonly followed by investor panic and massive funds withdrawals leading to liquidity shortages.
  • Extremely high costs for rescuing the financial system in the event of a systemic crisis.

For these reasons, prevention and mitigation of risks is essential, particularly to avoid any repetition of such heavy losses.
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