Study on the

Chapter IV. Conclusion

1. 
   Summary of Key Findings
   

This thesis examined the Indonesian financial system in the context of the financial crisis.

The Indonesian financial system has been liberalized broadly and has expanded rapidly without an adequate control system. The liberalization attracted external debt and substantially expanded bank credit. Excessive external debt, especially short-term debt impeded autonomy of the monetary policy. Extraordinary credit expansion resulted in a huge amount of NPLs. The Indonesian economy finally collapsed because of the crashed financial system, irrational exchange rate system, weakened export competitiveness, etc. The main problems of the financial system were under-capitalization of banks, excessive currency and maturity mismatch of assets, government involvement, heavy burden of NPLs, bankruptcy legal system, non existence of prudential regulation and supervision, and etc. However, the most fundamental reason was the moral hazard of the government and the financial system.

2. 
   Suggestions for Improving the Banking System in Indonesia and Korea
   

There are many commonalties between Indonesia and Korea regarding the
financial crises. The most salient factor is the deleterious-both external and internal- environment of the banking system in the respective countries, which has played a very important role in triggering the financial crises. Above all, these factors must be improved for the banking system to contribute to the national economy.

O Internal Reforms

Many people point out the politicians’ and government officials’ deep involvement in the deteriorated banking system. This is true. But the real responsibility belongs to the bank personnel. Traditionally, the government made decisions on lending related to big projects and became involved in all bank affairs, especially personnel affairs. Therefore, the bank officers had no incentive to carefully evaluate a project and to review customers credit because they often do not have the authorization to reject loan application in those cases. If a bank loan officer wanted promotion, he had to please senior officers and government officials. This is the origin of corruption and distortion of the financial system. Here, I would like to suggest two solutions to improve the distorted banking system.

First, the evaluation of the bank loan officer should be measured by his performance.

Second, the banking system should be transformed from a highly hierarchical generalist organization to a flat expert organization. If a bank officer is an expert in a specific field and is evaluated by his performance, he does not need to have to worry about his senior’s face and government official’s interference. The expert should be equipped with the necessary expert knowledge so that his expertise can overcome whatever interference. The pre-condition of flat expert organization is satisfactory economic compensation for the expert instead of promotion. If people do not care about promotion by getting enough compensation according to their performance, the external interference can be meaningless. This is the first step to disentangle the distorted banking system.

b. External Reform

The worst thing in financial transaction is default. If a borrower does not repay his debt, he should be punished. All of his wealth should be confiscated and repaid to the creditor. The borrower should be left to be a beggar without a penny after default. It is the justice of capitalism. In reality, sometimes the borrower in default is financially well off, though he fails to repay his debt. This circumstance may cause a moral hazard because the borrower does not need to care about his liability. These kinds of moral hazard are pervasive in Indonesia. It is an outright refusal of the principle of capitalism. Who dares to do business in that circumstance? Similar nonsense also occurs in Korea very frequently. Establishing a systematic apparatus is indispensable as it discourages people
from the moral hazard due to severe punishment.
O Indonesia
There are many reasons why the Indonesian economy and the banking system collapsed. But the problem seems to be the moral hazard. If a person does not have to worry about the loss of his all-economic belongings when he defaulted on his debt, a rational economic system and a reasonable financial system may never be achieved in spite of any official legal system. I examined the Indonesian new bankruptcy system in the preceding section. The new bankruptcy law has many implications, which can be the perfect solution to restore confidence of the Indonesian financial system and economic justice under capitalism. I do not believe the important thing is formal institutions, but rather, the will of the people.

O Korea

The economic environment relating to moral hazard in Korea is not better than that of Indonesia. The GDP per capita level of Korea was more than 10 times higher than that of Indonesia before the financial crisis. Even though the size of Indonesia is more than 20 times larger than that of South Korea, the total amount of export in Korea is over 2.5 times larger than that of Indonesia. But I have difficulty in judging who is better off in terms of financial system or moral hazard.
Korean or Indonesian distressed loan assets can not attract international investors at present day. On the other hand, Thai assets are more popular than those of Korean or Indonesian, and Hong Kong companies’ assets are most popular in South-Asia. Some investors indicated that they could forecast the future liquidation process reasonably under the Hong Kong legal system. This means the predictability and stability of the legal system are necessary conditions to attract international investors.

Most Korean banks accept mortgages for real estate as collateral. There is a certain ranking among collateral, where the ranking is registered in court. The mortgage principle, to which advanced creditor has priority over appropriating debtor’s asset for his credit. The principle is very important for the financial institutions as it decides their portion when the debtor collapses.

However, the principle is ignored very often, which means that the ranking of mortgage is meaningless. If any big corporation is in default, it will mostly go to composition or court receivership instead of the liquidation process. This means that a creditor can not take his credit according to the mortgage ranking and the debtor can maintain his business and assets. I think that the Korean court abuses composition and court receivership, and its decision spoils the economic justice. The abuse of composition or court receivership caused serious moral hazard of corporate and financial institutes.

First, the corporation do not fear forceful deposition of his assets by bankruptcy.

The government always protects their business and assets, and bails out their debt. Korea is a heaven for an immoral corporate owner.

Second, financial institutions should always look over their mortgage ranking carefully. If they are subordinated rankers in mortgage, they have to check carefully the debtor’s credit and the feasibility of projects. But the principle is a ridiculous one because mortgage ranking is generally meaningless when big corporation go bankrupt. The Korean financial institutions do not have the incentive to evaluate debtor’s credit and project because there is no difference between the senior ranker and subordinated ranker.

To develop a sound financial system, all of the above should be fundamentally improved.

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