Saturday, August 2, 2008

Introduction to the Blog on Basel II and Risk Management in Indonesia

Basel 2 experience is the title of this blog to stress the importance of the 'soft' side of the Basel II framework, i.e. to enhance corporate governance, provisioning standards, stress testing, risk disclosures and internal capital adequacy assessment process... etc. The emphasis is thus on the Pillar 2 process both within the supervisory body as well as within regulated financial institutions.

Implementing Basel II framework is not so much about implementing the Basel II quantitative formulae, but to experience the 'journey' of continually improving risk management practices.

While Basel II has been embedded in major banks in more advanced countries, implementation of Basel II has met a number of obstacles in many developing countries.

A key challenge to put it to work is the lack of standardization and appreciation of the Pillar 2 approach. Therefore, I believe it is useful to initiate a forum that facilitates exchanges of experience as well as accumulates resources relevant to Basel 2 implementation and risk management of financial institutions.

The blog is primarily dedicated to the stimulation of discussion on Basel II and encouragement to advance risk management practices, particularly in the Indonesian banking sector. Articles, practical experiences and case studies by those who are interested in banking and financial regulations will be very welcome.

The blog is also a place to share my thoughts and comments on economic, financial policies and regulatory developments. Hence, for market outlook and forecast, readers should consult other sites...

Failing to experience the Basel II compliance in its wholeness risks an emergence of a false sense of soundness in the financial system and within individual banks. This occurs for example when banks - or the regulator - hold up and promote high capital adequacy ratios (CAR) but stop short of living up to the 'soft' elements of the Basel II capital accord, which may turn out to be more essential. Overemphasizing the CAR compliance per se without meeting those 'soft' conditions would put us a target of  'Goodhart Critique' (see here for its relevance in monetary policy). When we actually need it, capital is not there for example because it is needed to satisfy regulatory requirements, or its quality and quantity are not enough to cover unidentified "Pillar 2" risks.

To remind us of that - false sense of security - risk and to emphasize the nexus between Basel II and risk in the broadest sense of meaning, I name this website/