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Indonesia's New Deposit Guarantee Law

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  • Ross H. McLeod

Abstract

The blanket guarantee introduced in 1998 in response to the emerging banking and economic crisis resulted in $50 billion of losses to the general public. The government has now introduced a law that enables the phasing out of this blanket guarantee, but which also allows for its reinstatement in the event of any threatened collapse of the banking system. Rather than eliminating the possibility of any repetition of the previous banking disaster, the new law effectively mandates an almost identical approach to handling system-wide banking collapses in the future, suggesting that the authorities and their advisers learned very little from the recent bitter experience. It is argued here that the crucial starting point for formulating policy in this field is to correctly specify the exact purpose that government intervention is intended to serve: namely, the avoidance of major macroeconomic disruption as a result of bank failures.

Suggested Citation

  • Ross H. McLeod, 2005. "Indonesia's New Deposit Guarantee Law," Departmental Working Papers 2005-08, The Australian National University, Arndt-Corden Department of Economics.
    • Handle: RePEc:pas:papers:2005-08
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    File URL: https://crawford.anu.edu.au/acde/publications/publish/papers/wp2005/wp-econ-2005-08.pdf
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    References listed on IDEAS

    as
    1. Manning Mark J, 2003. "Finance Causes Growth: Can We Be So Sure?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-24, December.
    2. J. Soedradjad Djiwandono, 2004. "Liquidity support to banks during Indonesia's financial crisis," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 40(1), pages 59-75.
    3. Ross Mcleod, 2005. "Survey of recent developments," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 41(2), pages 133-157.
    4. Mr. Mari Pangestu & Mr. Manggi Habir, 2002. "The Boom, Bust and Restructuring of Indonesian Banks," IMF Working Papers 2002/066, International Monetary Fund.
    5. Hadi Soesastro & Raymond Atje, 2005. "Survey of recent developments," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 41(1), pages 5-34.
    6. Demirguc-Kunt, Asli & Karacaovali, Baybars & Laeven, Luc, 2005. "Deposit insurance around the world : a comprehensive database," Policy Research Working Paper Series 3628, The World Bank.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Ross H Mcledo, 2008. "The Soeharto Era: From Beginning to End," Departmental Working Papers 2008-03, The Australian National University, Arndt-Corden Department of Economics.
    2. Muhammad Afdi Nizar & Alfan Mansur, 2023. "Can the Indonesian banking industry benefit from a risk-based deposit insurance system?," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 16(1), pages 177-196, January.
    3. Emmanuelle Nys & Amine Tarazi & Irwan Trinugroho, 2013. "Political Connections, Bank Deposits, and Formal Deposit Insurance: Evidence from an Emerging Economy," Working Papers hal-00916513, HAL.
    4. Nys, Emmanuelle & Tarazi, Amine & Trinugroho, Irwan, 2015. "Political connections, bank deposits, and formal deposit insurance," Journal of Financial Stability, Elsevier, vol. 19(C), pages 83-104.
    5. Ross H. McLeod, 2006. "Private Sector Lessons for Public Sector Reform in Indonesia," Agenda - A Journal of Policy Analysis and Reform, Australian National University, College of Business and Economics, School of Economics, vol. 13(3), pages 275-288.

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    More about this item

    Keywords

    banking; bailout; deposit guarantee; deposit insurance; moral hazard;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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