Indonesia's New Deposit Guarantee Law

Ross McLeod ()

Departmental Working Papers from The Australian National University, Arndt-Corden Department of Economics

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.

Keywords: banking; bailout; deposit guarantee; deposit insurance; moral hazard (search for similar items in EconPapers)
JEL-codes: E42 E44 G21 G28 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2005-08
New Economics Papers: this item is included in nep-dev, nep-ias, nep-mac and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Indonesia's new deposit guarantee law (2006)
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