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Measuring the Vulnerability of Financial System in the Middle of Dynamics of Global and Domestic

EconomySubtheme: Measuring the effect of the vulnerability of

Financial System in ASEAN

(Case Study in ASEAN: Thailand and Indonesia)

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Contents

• Abstract……………………………………………………………………………………………….…..3• Chapter I Background of the Research……………………………………………………..4• Chapter II The Purposes of the Research………………………………..…………….....5• Chapter III Literature Review……………………………………….…………..……..……....6• Chapter IV Methodology and Data………………………………...………………….…….9• Chapter V Analysis………………………………………………………….………..…………....11• Chapter VI Conclusion and Policy Recommendation………………….……….....20• Chapter VII References…………………………………………………………………..…...….25

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Abstract

• the law of competency and the law of economic growth

• adaptive questionnaire

• Standard Deviation CSA Fund Facts Investment Risk Scale.

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Chapter I Background of the Research

• The Asian Financial Crisis, AFTA 2015 and Globalization 2020

• Central Bank as the doctor for national financial crisis and IMF as the doctor for international financial crisis

• systemic risk which can threat Thailand and Indonesia from 2014 until 2016.

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Chapter II The Purposes of The Research

• To identify the main sources of financial crisis risk

• Measuring the effect of the vulnerability of Financial System in ASEAN

• How to minimize the effect of the main sources of financial crisis with policy respond?

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Chapter III Literature Review

• Risk and Sources of Risk

• National Financial Crisis (Domestic), Global Financial Crisis and Other Financial Crisis

• So how can we know the effect of the vulnerability of Financial System in ASEAN?

• And then what is financial stability?

• The higher the Economic Growth, the higher the risk the Central Bank faces (the law of the economic growth).

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• The higher the Competency, the lower the risk the Central Bank faces (the law of the competency)

• The higher their competency, the higher Risk premium they can face in order to achieve the higher Economic Growth. But if the Central Banks face Risk Premium > Competency, they will face the Financial Crisis.

• To achieve the optimal value of Economic Growth we can see from the intersection between the Economic Growth Function and Competency Function at the Equilibrium. The Equilibrium reflects the optimal value of Economic Growth and the risk which Central Bank can face.

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• Systemic risk both in Indonesia and Thailand

• The sources of systemic risk can be poor regulatory framework, global imbalances, speculator (Broker Dealer) and others.

• Bank of Thailand and Bank Indonesia face the same sources of systemic risk

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Chapter IV Methodology and Data

• IV.1 Methodology

• multiple case study

• case design : Research Question, Existing Theory and Thematizing the study, Case Selection, Case Study Protocol, Pilot Study, Data Collection, Data Analysis, Cross-case comparison, Findings and Conclusion

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Chapter IV Methodology and Data

• IV.2 Data

• Data : Documentation, Archival and Interview through emailed questionnaire.

• validity, reliability, and generalizability : Triangulation and Collect Referential Materials

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Chapter V Analysis

• V.I Adaptive Questionnaire from Deloitte (Emailed Questionnaire)

• Impact refers to the extent to which a risk event might affect.

• Likelihood represents the possibility that a given event will occur.

• Vulnerability refers to the susceptibility of the entity to a risk event in terms of criteria related to Indonesia’s preparedness, agility, and adaptability.

• Velocity refers to the time it takes for a risk event to manifest itself, or in other words, the time that elapses between the occurrence of an event and the point at which the country first feels its effects.

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Chapter V Analysis

• Bank of Thailand, Thitinant and Farma from Indonesia who work as a lecture at University of Indonesia.

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V.I Adaptive Questionnaire from Deloitte (Emailed Questionnaire)

V.1.1 Thailand

• National Financial Crisis :• Consequence/Vulnerability : M

• Consequence/Likehood : M

• Velocity/Vulnerability : H

• Velocity/Likehood : H

V.1.2 Indonesia

• National Financial Crisis :• Consequence/Vulnerability : H

• Consequence/Likehood : H

• Velocity/Vulnerability : E

• Velocity/Likehood : E

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V.1.1 Thailand

• Global Financial Crisis (The Fed) :

• Consequence/Vulnerability : H




• Global Financial Crisis (Financial Innovation)





V.1.2 Indonesia

• Global Financial Crisis (The Fed) :


• Consequence/Likehood : M



• Global Financial Crisis (Financial Innovation)

• Consequence/Vulnerability : E

• Consequence/Likehood : E



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V.1.1 Thailand

• Global Financial Crisis (Global Macroeconomic Imbalances ) :





• Other Financial Crisis (Speculator) :





V.1.2 Indonesia

• Other Financial Crisis (Speculator) :





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V.2 Linking data to Propositions (Documentation and Archival records)

V.2 .1 Inflation Risk

• Thailand

• the highest inflation in Thailand is on 14th May 2014 calculated 2.6 % and policy rate from Bank of Thailand is 2 %. It means National Financial Crisis in Thailand because of poor regulatory framework measured by inflation and interest rate is low.

V.2 .1 Inflation Risk

• Indonesia

• the highest inflation in Indonesia is on December 2014 calculated 8.4 % and policy rate from Bank of Indonesia is 7.8 %. It means National Financial Crisis in Indonesia because of poor regulatory framework measured by inflation and interest rate is medium.

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V.2 .2 Exchange Rate Risk, Procyclicality and Systemic Risk

• Thailand

• the highest exchange rate in Thailand is on 2015 calculated 36.04 and the reserves was 156.5 US$ billion. It means National Financial Crisis because of systemic risk in Thailand is low based on Standard Deviation =1.83231438 and calculated approximately 6 percent.

• The Size Systemic Risk In Thailand because of exchange rate risk based on Cloud Computing Risk which was used by Department of Finance, Government of Western Australia is Minor = Under $ 500 K (2)

• the cost of intervention in 2015 approximately 0.6 billion from 2014 until 2015.

• there is no procyclicality condition. When the inflation is decreasing from 2.6 to -1.3 but the exchange rate is increasing from 32.92 to 36.04.


• Indonesia

• the highest exchange rate in Indonesia is on October 2015 calculated 14,654 and the reserves was 100.7 US$ billion It means National Financial Crisis in Indonesia because of systemic risk is medium based on Standard Deviation = 1004.102and calculated approximately 8 percent

• The Size Systemic Risk in Indonesia because of exchange rate risk based on Cloud Computing Risk which was used by Department of Finance, Government of Western Australia is Moderate = $ 500k-5m (3)

• the cost of intervention in 2015 approximately 15,3 billion from 2015 to 2016.

• there is noprocyclicality condition. When the inflation is decreasing from 8.4 to 3.4 but the exchange rate is increasing from 12.188 to 14.654.

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• there is contagion effect from QE tapering, FFR Hike & concern about China’s hard landing to the capital market and finally affect the financial stability in exchange rate in Thailand from 32.92 to 36.04

• there is interconnectedness between the Federal Reserve in USA with Capital Market in Thailand and finally affect the financial stability in exchange rate in Bank of Thailand.

• The complexity of the institution is complex because the systemic risk came from the federal reserve, capital market and central bank in Thailand.


• there is contagion effect from QE tapering, FFR Hike & concern about China’s hard landing to the capital market and finally affect the financial stability in exchange rate in Indonesia.

• there is interconnectedness between the Federal Reserve in USA with Capital Market in Indonesia and finally affect the financial stability in exchange rate in Bank Indonesia.

• The complexity of the institution is complex because the systemic risk came from the federal reserve, capital market and central bank in Indonesia.

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V.2 .3 Cross Case Comparison between Thailand and Indonesia

• Thailand• the decreasing of inflation 3.9 % cause the

decreasing of interest rate 0.5 % but Economic Growth in Thailand is increasing on 2015 calculated 2 %.

• Economic Growth in Indonesia (5 and 4,8) is higher than in Thailand (0.8 ad 2,8) because Indonesia face higher financial risk (inflation, interest rate and inflation) than in Thailand. It is suitable to the law of Economic Growth, my proposition.

V.2 .3 Cross Case Comparison between Thailand and Indonesia

• Indonesia• the decreasing of inflation 3.9 % cause the

decreasing of interest rate 0.5 % but Economic Growth in Thailand is increasing on 2015 calculated 2 %.

• Economic Growth in Indonesia (5 and 4,8) is higher than in Thailand (0.8 ad 2,8) because Indonesia face higher financial risk (inflation, interest rate and inflation) than in Thailand. It is suitable to the law of Economic Growth, my proposition.

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Chapter VI Conclusion and Policy Recommendation

• VI.1 Conclusion• The higher their competency, the higher Risk premium they can face in order to achieve

the higher Economic Growth. But if the Central Banks face Risk Premium > Competency, they will face the FinancialCrisis.To achieve the optimal value of Economic Growth we can see from the intersection between the Economic Growth Function and Competency Function at the Equilibrium. The Equilibrium reflects the optimal value of Economic Growth and the risk which Central Bank can face.

• The data was collected through adaptive questionnaire from Deloitte and measured by using Cloud Computing Risk which was used by Department of Finance, Government of Western Australia. After I have validated the result from Thitinant, Bank of Thailand and Farma, a lecturefrom University of Indonesia to the Linking Data to Proposition, both of them overestimate to assess the financial risk. It is because of lack of competency in knowledge both about the reality in Thailand and Indonesia. Based on Standard Deviation CSA Fund Facts Investment Risk Scale, the standard deviation in Thailand is low, calculated 6 percent and standard deviation in Indonesia is medium, calculated 8 percent.

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• There is no procyclicalitycondition in Thailand. When the inflation is decreasing from 2.6 to -1.3 but the exchange rate is increasing from 32.92 to 36.04. There is no procyclicality condition in Indonesia. When the inflation is decreasing from 8.4 to 3.4 but the exchange rate is increasing from 12.188 to 14.654.

• There is contagion effect from QE tapering, FFR Hike & concern about China’s hard landing to the capital market and finally affect the financial stability in exchange rate both in Thailand and Indonesia. We also can summarize that there is interconnectedness between the Federal Reserve in USA with Capital Market both Thailand and in Indonesia and finally affect the financial stability in exchange rate both in Bank of Thailand and Bank Indonesia. The complexity of the institutution is complex because the systemic risk came from the federal reserve, capital market and central bankboth in Thailand and Indonesia.

• Economic Growth in Indonesia (5 and 4,8) is higher than in Thailand (0.8 and 2,8) because Indonesia face higher financial risk (inflation and exchange rate risk) than in Thailand. It is suitable to the law of Economic Growth, my proposition.

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• VI.2 Policy Recommendation

• To run good regulatory framework both Bank of Indonesia and Bank of Thailand need to reassess their employees with a new standard of competency every year and if needed, they can be restructured and recruit the new ones. The minimum required competency can be discussed with Madam Christine, IMF in order to develop an international banker. The International Banker must be certificated in order to make sure their competency fulfill the International Banker.

• In addition, Bank of Indonesia and Bank of Thailand must benchmark their competency each year to The Federal Reserve in order to increase their competency and adapt to dynamics of global and domestic economy.

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• In the long run ASEAN and in cooperation with IMF need to build an ASEAN Central Bank in order to make a stronger regulator in order to implement Financial Stability in ASEAN and face the globalization in 2020. Furthermore, ASEAN can makeASEAN Single Currency after IMFand ASEAN can make convergence the macroeconomic indicators.

• The Tax Policy Capital Outflow can be implemented in Indonesia and Thailand to protect the financial stability in the capital market which affect the exchange rate and force Central Bank spend Cost of Intervention. The Tax Policy Capital Outflow has weakness to make the speculators do not want to invest in Indonesia and Thailand. Both Bank of Thailand and Bank of Indonesia must make the compensation like Easier Program to Invest, Capital Inflow, to both in Thailand and in Indonesia.

• Investor Award Program which is held by the capital market and central bank to choose the best investor in supporting the financial stability both in Thailand and Indonesia. This Award can be given every year in order to create good financial stability both in Thailand and Indonesia.

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Chapter VII References

• Asian Development Bank (2016), Asia’s Potential Growth• Bank Indonesia (2015), MonetaryPolicy Report, Quarter II• Bank of Thailand (2015), Financial Stability Report• Berg-Schlosser, D., De Meur, G., Rihoux, B. and Ragin, C. C. (2009). Qualitative comparative analysis

(QCA) as an approach. In: Rihoux, B. and Ragin, C. C. (eds.) Configurational comparative methods. Thousand Oaks, CA: Sage.

• De Vos, A.S.; Strydom, H.; Fouchè; C.B. and Delport, C.S.L. 2002. Research at grass roots. For the social sciences and human service professions. 2nd Edition. Pretoria: Van Schaik Publishers.

• _________ (2007): “Progress towards a framework for financial stability assessment”,• speech by José-Manuel González-Páramo, Member of the Executive Board of the ECB,OECD World

Forum on “Statistics, Knowledge and Policy”, Istanbul, 28 June.• Emig, J. (1971) The Composing Processes of Twelfth Graders. Urbana: NTCE. This case study uses

observation, tape recordings, writing samples, and schoolrecords to show that writing in reflexive and extensive situations caused different lengths of discourse and different clusterings of the components of the writing process.

• George Soros (2000) : “Transcript : Financial Market”, 27 October• Government of Western Australia (2014) : “Cloud Computing Risk”, 21 February• Gray, DF, RC Merton and Z Bodie (2007): “New framework for measuring and managing

macrofinancial risk and financial stability”, NBER Working Paper no 13607, November.

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Chapter VII References

• Hawkins, J and M Klau (2000): “Measuring potential vulnerabilities in emerging market economies”, BIS Working Papers, no 91, October.

• International Monetary Fund (2006): Financial Soundness Indicators: Compilation Guide, March.• International Monetary Fund (2016): “ Systemic Risk Monitoring (“Sysmo”) Toolkit-A User Guide”,

IMF Working Paper, wp/13/168 March.• 2011a, ―Japan: Spillover Report for the 2011 Article IV Consultation and Selected Issues,‖ IMF

Country Report No. 11/183, July.• Kevin P. Gallagher (2012) : The Myth of Financial Protectionism: The New (and Old) Economics of

Capital Controls, January• Nelson, W R, Perli, R (2005): “Selected indicators of financial stability”, 4th Joint Central Bank

Research Conference on “Risk Measurement and Systemic Risk”, ECB Frankfurt am Main, November.

• Merriam, S. B. (1985). The Case Study in Educational Research: A Review ofSelected Literature. Journal of Educational Thought, 19.3, 204-17.The article examines the characteristics of, philosophical assumptionsunderlying the case study, the mechanics of conducting a case study, and theconcerns about the reliability, validity, and generalizability of the method.

• The Investment Funds Institute of Canada (2014): “Voluntary Guidelines for Fund Managers Regarding Fund Volatility Risk Classification”, August.

• Yin, R.K. Case Study Research, Design and Methods, Sage Public• Yin, R. K. (2009). Doing case study research. 4th ed. Thousand Oaks, CA: Sage.

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