Monday, June 29, 2009

Back to Basics: The Best Response by Banks to The Crisis

Amidst the ongoing global financial crisis, the annual bankers’ speech delivered by the Governor of Bank Indonesia at the end of January emphasized the importance of national banks going "back to basics". The request was directed to all financial institutions, especially banks. This announcement by the Governor was based on the reality that the current crisis faced can be seen as a consequence of financial sector development that is detached from its root, namely the real sector.

The appeal for banks to go back to basics is not merely limited to banks in Indonesia, but also in America, where the current economic turmoil began. Frederick Holmes, a Professor Emeritus of medicine from the University of Kansas wrote an open letter in The Economist, edition 14 on 20th February 2009. In the letter he expressed satisfaction at being a customer of a local bank in Kansas City for 40 years, which operates conservatively. He wrote, "Despite the death knell sounded throughout the media, most people and most banks did not encumber themselves with mountains of unsecured debt. In the conservative heartland of America we have avoided the razzle-dazzle of "sophistication" and “computer-modeling" when managing our finance." Meanwhile, on the other hand the CEO of the bank endeavored to reassure worried customers during these troubling times by declaring: "when the siren song of the subprime-mortgage market came along, we took the long view and turned a deaf ear." This announcement was possible because the bank in question did not engage in subprime lending, which would have endangered the condition of the bank. It is therefore proven that the conservative actions of the bank safeguarded it from the impacts of the financial crisis.

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