Bank Indonesia Macroprudential Policy for Promoting Inclusive Financing

The term macroprudential at that time became popular in the financial sector after the global financial crisis  in 2008. The global financial crisis in 2008 has provided very valuable lessons for us, especially the people of Indonesia. 

Although not directly, Indonesia was still affected by the 2007/2008 global financial crisis which was triggered by product failures subprime mortgage in the United States. Overall, macroprudential policies have become a virtue of an integrated Bank Indonesia, but after the economic crisis in 2008 it became a concern and much discussion about how to implement policies in an integrated and systematic manner.

The 2008 financial crisis that caused almost the entire world to experience financial stress was caused by several things, including: Imbalance in capital flow deviations between countries & inadequate supervision of financial regulations & monetary policy in many countries (Bank Indonesia, 2015).

Prior to the 2008 crisis, the monetary policy carried out put more emphasis on several portfolios that did not systematically support macroprudential policies. Where the financial system before the 2008 crisis was more reliant on monetary & microprudential policies that regulate individuals who have funds which are an acceleration catalyst in encouraging economic growth (Claessens, 2015).

Macroprudential policies that became popular after the 2008 global economic crisis have actually been discussed since the 1970s, but have not been widely applied since the 2008 global financial crisis, which had a negative impact on the world's economic downturn due to cause-and-effect relationships (feedback loop), between the financial sector and the real sector resulted in high crisis costs with a long recovery time.

Macroprudential policy is defined as a policy that aims to limit the risks and costs of a systemic crisis or the risk of financial system failure (Galati G., and Richhild M., 2011). According to the IMF, macroprudential policy must cover at least 3 things: maintaining financial system stability, being oriented towards the overall financial system (system-wide perspectives) and limit the occurrence of systemic risk (IMF, 2011).

Maintaining financial system stability in this perspective is not only done by Bank Indonesia alone. Mutual assistance between the authorities concerned is very influential in maintaining the stability of this system so that it survives at any time when there is an economic shock. 

Bank Indonesia as the central bank through monetary, macroprudential and payment system authorities; government through fiscal authority; and service industry regulatory authorities financial institutions such as OJK & LPS through microprudential authority, so that the implementation of macroprudential policies is very possible through interaction with other clear policies where all policy decisions are made, especially with policies that have an impact on the financial system (Bank Indonesia, 2015).

The financial system in particular must be able to support several policy functions including: performing intermediation functions, risk management in the financial system and facilitating payment system operations (Schinasi, 2004).

Bank Indonesia itself as the monetary, banking and payment system authority, Bank Indonesia's main task is not only to maintain monetary stability, but also financial system stability (banking and payment systems). The success of Bank Indonesia in maintaining monetary stability without being followed by financial system stability will not mean much in supporting sustainable economic growth. Monetary stability and financial stability are inseparable. Monetary policy has a significant impact on financial stability and vice versa, financial stability is a pillar that underlies the effectiveness of monetary policy. On the other hand, monetary instability will fundamentally affect financial system stability due to the ineffective functioning of the financial system.

The main roles that include policies and instruments in maintaining the stability of the financial system of Bank Indonesia are divided into 5  tasks:

• First, Bank Indonesia has the task of maintaining monetary stability, among others, through interest rate instruments in open market operations. Monetary policy through the application of interest rates that are too tight will tend to kill economic activity. Vice versa,  therefore to create monetary stability, Bank Indonesia has implemented a policy called inflation targeting framework or commonly  known as the annual inflation target.
• Second, Bank Indonesia plays a vital role in creating sound financial institution performance. The banking sector has a dominant share in the financial system, so failure in this sector can lead to financial instability and disrupt the economy. To prevent such failure, an effective banking supervision and policy system must be enforced. This is intended to protect banks and stakeholders and at the same time encourage confidence in the financial system.
• Third, Bank Indonesia has the authority to regulate and maintain the smooth running of the payment system. Bank Indonesia is developing mechanisms and regulations to reduce the impact of risk in the payment system, which tends to increase and the complexity of the economic cycle, which is required to be faster, more practical, and less risky, especially in the current digital era, among others, by implementing a payment system that is real time or known as the RTGS system (Real Time Gross Settlement) & BI FAST which is valid 24 hours/7 days which has been launched & continues to be refined so that further improve the security and speed of the payment system. As an authority in the payment system, Bank Indonesia has the information and expertise to identify potential risks in the payment system.
• Fourth, research & monitoring function. Through macroprudential monitoring, Bank Indonesia can monitor the movement of the financial sector and detect potential surprises (potential shock) which has an impact on financial system stability. Through research, Bank Indonesia can develop instruments to recover if vulnerabilities or threats are detected in the financial system and macroprudential indicators to detect financial sector vulnerabilities. The results of the research and monitoring will then become recommendations for the relevant authorities in taking appropriate steps.
• Fifth, Bank Indonesia has a function as a financial system safety net through which the central bank functions as a Lender of The Last Resort (LoLR). This function is only given to banks that face liquidity problems and have the potential to trigger a systemic crisis. Under normal conditions, the LoLR function can be applied to banks that experience temporary liquidity difficulties but still have the ability to repay. Therefore, consideration of systemic risk and strict requirements must be applied in providing such liquidity.

Previously, it was explained according to Schinasi (2004) that the financial system in particular must be able to support the ease of implementation of the payment system or what we usually know as financial inclusion. Reported from the official website of the World Bank (2020) that financial inclusion is access for every person or business to be able to take advantage of financial products or services. This service plays an important role in being able to meet all human needs every day, such as payment transactions, savings, credit and insurance that can be carried out effectively and continuously. Meanwhile, based on the Regulation of the Financial Services Authority or OJK Number: 76/ POJK.07/2016, financial inclusion is the availability of access to various products, financial services and institutions.

Reported from the official website of Bank Indonesia. Bank Indonesia has 5 macroprudential policy instruments to support  financial inclusion, namely:

1.  Countercyclical Capital Buffer (CCyB)

Reported fromofficial pageBank Indonesia, Countercyclical Capital Buffer (CCyB) is additional capital that functions as a buffer to anticipate losses in the event of excessive credit growth and/or banking financing (excessive credit growth) thus potentially disrupting financial system stability. CCyB needs to be implemented in the demonstrated if credit growth and economic growth are directly proportional. In general, Bank Indonesia will increase the CCyB amount when the economy is expanding/fast growing, on the other hand, Bank Indonesia will decrease the CCyB amount in when the economy is contracting / declining or sluggish. The amount of CCyB is dynamic, ranging from 0% to 2,5% of the bank's Risk Weighted Assets (RWA).

2.  Loan to Value or Financing to Value Rasio (LTV/FTV)

Loan to Value or Financing to Value (LTV/FTV) ratio is the ratio between the value of credit/financing provided by Conventional and Islamic Commercial Banks to the value of collateral, in the form of property at the time of lending/financing based on the latest assessment results. The LTV/FTV policy also aims as a macroprudential instrument to encourage a balanced and quality banking intermediation function in supporting national economic growth while maintaining financial system stability. This Macroprudential policy instrument is countercyclical and can be adapted to changing economic and financial conditions. One of the objectives of the LTV/FTV policy is to maintain financial system stability and mitigate systemic risks stemming from rising property prices. The LTV/FTV policy also aims as a macroprudential instrument countercyclical and can be adapted to changing economic and financial conditions.

3.  Macroprudential  Intermediation  Ratio

The Macroprudential Intermediation Ratio (RIM) is a macroprudential instrument aimed at managing the banking intermediation function to match the capacity and target of economic growth while maintaining the principle of prudence. RIM's policy accommodates the diversity of forms of banking intermediation by including bank investments in securities. RIM encourages the creation of a balanced and quality intermediation function, so as to prevent and reduce risks and banking behavior that tends to be procyclical.

4.  Macroprudential Liquidity Buffer

Macroprudential Liquidity Buffer (PLM) is a minimum liquidity reserve in Rupiah that must be maintained by Conventional Commercial Banks and Islamic Commercial Banks in the form of securities in Rupiah that can be used in monetary operations.

5.  Short-Term Liquidity Loans (PLJP)

Short-Term Liquidity Loans (PLJP) are loans from Bank Indonesia to Banks to overcome Short-Term Liquidity difficulties experienced by the Bank. The PLJP provisions include several requirements including:

• PLJP/PLJPS interest rate adjustments,
• improvement of credit collateral requirements,
• addition of other collateral for collateral as a risk mitigation measure,
• acceleration of the process at Bank Indonesia, and
• completion of the verification and asset valuation process with independent parties prior to the PLJP application.

Based on the Regulation of the Financial Services Authority or OJK Number: 76/POJK.07/2016, financial inclusion is the availability of access to various products, financial services and institutions. Various financial services in it can be chosen according to the ability and needs of the community such as making loans, buying property and also accessing other finances. Bank Indonesia's macroprudential policies above always support financial inclusion where each policy is implemented for easy access for the public. The central bank, as the payment system authority, carries out macroprudential duties to prevent systemic risks, promote a balanced and quality intermediation function, and increase financial system inclusiveness and financial access, closely related to the central bank's task of creating a secure payment system, efficient, smooth, and reliable including the payment system, and prevent the occurrence of systemic risk. Financial inclusion as part of macroprudential policy objectives also has very good benefits for every level of society, namely:

1.  Help Improve Economic Equity

Financial inclusion has a very large effect because it can help increase financial equity in all levels of society. Everyone will be able to use financial products or services appropriately and will be able to help alleviate their economic problems. Such as by applying for a loan to a bank that will be used for capital to build a business venture. Even when they face financial difficulties, they can also sell their assets so that they will be able to save their financial condition.

2.  Providing Understanding to the Community

When people have access to financial products or services, it is certainly very beneficial for their lives. People will understand more about how to manage their financial condition well, such as opening a bank account if they want to save. In addition, people can also invest if they want to own passive income. Thus, financial inclusion is able to increase understanding and awareness of how people manage their finances.

3.  Prepare a Good Financial Plan

Financial inclusion will also be able to provide an opportunity for everyone to be able to prepare their financial management in a mature manner where the central bank remains encourage a balanced and quality banking intermediation function in supporting national economic growth while maintaining financial system stability. This ease of access to financial services will make it easier for everyone to prepare their financial plans in the future so that it will benefit them in the future.

4.  Increasing the Country's Economic Growth

Financial inclusion can increase economic development in a country if the country's financial system will be stable so that the economy in it can improve. When the economy is expansive, people can also get a capital loan to start their business, so they will be able to absorb more a lot of labor which will reduce the number of unemployed in the community. the target of increasing economic growth & increasing people's welfare. When the unemployment rate in a country can be reduced, then the level of the economy in a country will also certainly become stronger.

5.  Growing Financial Literacy Awareness

Financial literacy & financial inclusion have a close relationship. Basically, financial literacy is the ability, skill, knowledge, and belief that can influence attitudes or behavior to be able to determine the right policies related to finance because financial literacy is closely related to the understanding of every community in managing their financial condition. Based on a survey conducted by the 2019 National Financial Literacy Survey (SNLIK), it shows that the financial inclusion index of the Indonesian people has touched 76,19% while the financial literacy index has touched 38,03%. This figure is considered to have increased when compared to the results of a previous survey conducted by OJK in 2016. At that time, the financial inclusion index of the Indonesian people touched 67,8%, while financial literacy only touched 29,7%. When many people have good financial literacy, they can take advantage of financial services and products according to their abilities and needs to avoid unwanted risks, such as fraud or getting into bank debt.

Each country has greater flexibility in formulating the design and implementation of its macroprudential policy instruments in order to encourage inclusive financing. The importance of understanding the problem & trying to implement the best solution from each running mechanism to achieve the objectives of the policy implemented. 

Bank Indonesia is expected to always carry out monitoring to monitor everything that can affect the performance of the financial system. The government also has an obligation to assist Bank Indonesia in educating & increasing awareness of various financial institutions about the existence of potential segments in society, as well as looking for other ways to increase the distribution of financial products and services as well as the exchange of information between market players, such as increasing cooperation between financial institutions in order to increase business scale. This allows everyone to have access to use financial products or services so that the financial inclusion index and financial literacy of the Indonesian people can continue to increase.