1. Thinking ahead for Europe
Discussion: Interlink of Macro-Prudential Policy, Banking Characteristics, and the Lending Channel of Monetary Transmission
Willem Pieter de Groen, CEPS & EMEA
International Workshop on Financial System Architecture and Stability August 2017, Montreal (Canada)

2. Financial diversification
Indonesia financially still underdeveloped
Larger financial sector not always ‘improvement’
Size of the financial sector (% of GDP, end-2015)

3. Credit growth Indonesia
Coming from low levels (large increase in % small in amounts)
Credit growth (%) substantially higher than GDP growth (%)
Credit growth volatile between and downward trend since 2011

4. Credit growth Indonesia
Stable credit growth in % requires exponential growth in amounts (untenable and undesirable for longer term -> financial stability)
Linear growth results in declining growth rate

5. Credit growth Indonesia
Adjustment for base and GDP leads to differences in magnitude
Credit growth rate later years (>2010) relatively larger compared to first years
Increase instead of decrease in credit growth rate ( )

6. Impact policy measures
Correlation or causality?
Stable funding (non core deposits) higher loan growth? Non-stable funding came up only when the market deepened
Policy measures are in most cases re-active;
Taking place in (economic) downturn (no counterfactual), which might explain limited impact of changes in interest rates

7. Financial diversification
Indonesia’s financial markets are also underdeveloped
Capital markets structure (% of GDP, end-2015)

8. Corporate bond markets development
Financial markets in most countries only credible alternative for large companies (Top 30 represents 75% outstanding amount in Indonesia)
Indonesia’s financial markets are dominated by financial services issuers (±50% of corporate bonds)
Corporate debt securities – Outstanding amounts (% GDP)

9. Building blocks for efficient bond markets
Price discovery
Execution
Enforcement
Information about issuer
Accounting standards
Company data
Credit scoring
Conflicts of interests
Information about products
Prospectus rules
Credit ratings
Pre and post-trade reporting
Yield curve
Barriers to entry
Capital controls
Government intervention
Primary issuance access
Taxation
Barriers to exit
Prudential requirements
Public enforcement
Institutional set-up
Securities laws
Sanctions
Private enforcement
Insolvency proceedings
Redress procedures
Source: Amariei, De Groen, Valiante (2017)

10. Main recommendations Issuers
Expanding the issuer base with private companies beyond the finance-related firms and capital-intensive sectors is key. Options to speed up and simplify the process for issuing corporate bonds (the so-called ‘hybrid’ issuance process) and to eliminate the discriminatory tax regime (making bond interest expenses deductible) could be considered.
Investor base
Incentives for institutional investors, which are much smaller than banks and prefer to hold instruments to maturity, in order to shift investments from short-term to long-term assets and trade more, e.g. adjusting risk weights for the computation of regulatory capital or mandating investment in corporate bonds or project bonds, could be considered.
Market infrastructure
The implementation of a clearing mechanism for over-the-counter transactions, in addition to the currently available delivery-versus-payment system, together with a greater development of hedging tools could be an important improvement.

11. Summary
Dynamics emerging markets (EMs) can be different than advanced markets (AMs)
Indonesian financial sector still underdeveloped, both in terms of institutions and markets
Credit to GDP is despite substantial growth in past years still rather low
Measurement issue denominator changes results/perspective (less issue AMs)
Growth needs to be exponential to keep current pace in %, desirable? Impact on economy would increase
Potential explanation negative impact non-core deposits could be found in gradual saturation that coincides with financial market development
Financial market development no panacea. Additional policies need to be implemented to realize full potential

12. Contact: Willem Pieter de Groen willem.pieter.degroen@ceps.eu
Thinking ahead for Europe
Thank you!
Contact: Willem Pieter de Groen
Disclaimer: Unless otherwise indicated, the views expressed are attributable only to the presenters in a personal capacity and not to any institution with which they is associated.