Revitalising Reserve Requirement In Banking Model: An Industrial Organisation Approach

The objective of reserve requirement as a policy tool is mainly to control money supply in the economy. However, the changes of reserve requirement also affect banks´ interest rates. Thus, the changes will have an effect on banking optimal behaviour in maximising profits. Using the industrial organisation approach, this paper will evaluate the Indonesian banking sector in the course of designing an unconventional reserve requirement policy that link a bank´s reserve requirement ratio to the bank´s loan to deposit ratio. When a bank´s loan to deposit ratio increases, the bank will have a smaller ratio of reserve requirement. This incentive mechanism was implemented to accomplish Bank Indonesia´s intentions of increasing loan growth and reducing the “excess liquidity” in the Indonesian banking sector. The paper reveals that the policy is effective in boosting bank loans and consequently decreasing excess liquidity. It also suggests that the policy could provide another tool for the central bank to impact bank liquidity in order to support financial system stability.

The Supervisory Impact of Technology on SEACEN Financial Institutions: Issues and Challenges

The development of financial markets cannot be isolated from the influence of technology. Technology, especially information technology (IT), plays a dual role in the financial field - as the engine of development of financial products and as the engine of financial institution operations. The operations of financial institutions in SEACEN countries involving the use of IT take on the second role. The more advanced SEACEN countries can actually compete with the world leaders in IT implementation by financial institutions. However, in terms of the second role of IT, SEACEN countries are still following the lead of the developed countries. This research project is aimed at providing a comparative study on the IT implementation within SEACEN financial sectors, including its supervisory impacts, issues and challenges. The project also serves as a documentation of the development of IT implementation by financial institutions in the SEACEN region. Since most central banks in the region are the authorities for the supervision of banking systems and not of non-bank financial institutions, the discussions on financial institutions pertain to banks. The project addresses the international best practices in IT implementation, cross-country comparison regarding IT implementation by financial institutions, the supervisory impacts, and the IT supervisory framework. SEACEN countries have different levels of IT implementation and IT supervisory frameworks. The country papers and survey results show that there are three different levels of IT implementation in the SEACEN countries. They are: 1) Developed IT implementation and established IT supervisory framework; 2) Early stage of IT implementation with less-established IT supervisory framework; and 3) Less-developed IT implementation. For each level of implementation, countries face different issues and challenges. Wherever IT implementation has become an important part of financial institution operations and management, the SEACEN member central banks consider IT supervision as an integral part of the overall financial institution supervisory framework. However, since there is cross-country heterogeneity of IT implementation and IT supervisory framework, suggesting a minimum requirement for IT implementation for institutions and a model IT supervisory framework is very difficult. The research project also addresses some issues and challenges faced by the countries in the region in terms of mitigating IT risks and bringing IT implementation by financial institutions in the region to a level playing field according to international best practices. The issues and challenges suggest the need to increase cooperation among the SEACEN member countries to increase IT awareness, implement good IT governance through establishing IT supervisory frameworks which conform to international best practices, increase knowledge sharing and training programmes in order to speed up the spill-over effects from the more advanced countries in the region.