Bank Indonesia and the Crisis: An Insider's View

3 ideas

1. The November 1997 closure of sixteen banks

   Under the first IMF programme, Indonesia closed sixteen insolvent banks in November 1997 but did not guarantee all deposits, offering only limited protection to small depositors. Depositors could not tell sound banks from unsound ones and moved funds out of private domestic banks into state and foreign banks and out of the rupiah, so the closures intended to restore confidence set off a systemic run. The case shows how a partial resolution without a credible deposit guarantee can spread panic instead of containing it.

2. Central bank autonomy under personalised power

   Bank Indonesia was formally tasked with monetary stability but sat under a president whose family and cronies owned banks and could override technocrats. Seen this way, many contested decisions are outcomes of bargaining within a patrimonial state, where the governor's real choice was often between partial action and no action. Judging those decisions as though the bank was independent misreads who actually held the power.

3. Twin crisis of currency and banks

   Indonesian corporations and banks had borrowed heavily in unhedged short-term dollars under a managed exchange rate that seemed safe. When the rupiah was floated and collapsed, borrowers' foreign debts ballooned in rupiah terms, making borrowers and the banks that had lent to them insolvent. The weaker banks in turn pushed savers to dump rupiah, so each crisis deepened the other.

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