Description

There are some fundamental problems in current crisis management (resolution)framework: (i) the absence of comprehensive and clear policy; (ii) weaknesses in
government’s guarantee program (blanket guarantee) which creates moral hazard and may led to future financial crises; and (iii) unclear function of Bank of Indonesia as the lender of the last resort in a systemic crisis situation. Two key steps are suggested to
improve the crisis resolution in Indonesia: (i) a gradual replacement the current blanket guarantee with an explicit and limited deposit insurance scheme; and (ii) a more welldefined lender of last resort which is more transparent both in normal times and during systemic crises. A more transparent LLR policy will function as an effective tools for crisis management, provides a clearer accountability that may increase central bank’s credibility, reduce politic interference, reduce moral hazard and encourage market discipline which will eventually improve financial stability.