The Importance of the Lender of the Last Resort Function

Oct 13, 2025 by magicalceylontours.com 16 views

Introduction

The banking crisis is a phenomenon that cannot be ignored in a country's economy. This crisis often has the potential to cause a political crisis, and can even shake a government regime. The cause of the banking crisis can vary, but in general ended in liquidity problems, where banks are unable to fulfill their obligations. As a trusted institution and has an intermediation function, banks must maintain their liquidity well. On the other hand, the bank also acts as a bridge in the transmission of monetary policy issued by the central bank. Therefore, the health of banking institutions is very important for monetary stability.

Bank Indonesia, as a central bank, has the responsibility to ensure stability in the banking system. One way to maintain this stability is to carry out the function as a "lender of the last resort" or the last lender. When the bank faces liquidity problems and there are no other sources of funds that can be accessed, banks can utilize liquidity facilities provided by Bank Indonesia. This is an important mechanism to prevent the liquidity crisis that can be transmitted to other banks.

The purpose of this study is to understand the importance of the lender of the last resort function for the central bank, the way Bank Indonesia applies the function, as well as the challenges and legal implications that arise from its implementation. By using normative legal research methods and descriptive analysis, data taken through literature studies are analyzed qualitatively. The results of this analysis are expected to provide a deeper insight about the issue under study.

The Importance of the Lender of the Last Resort Function

The function of the lender of the last resort at the central bank is very important to maintain macroeconomic stability. In this context, the central bank is responsible for creating an environment that is conducive to the health of banking institutions. The desired monetary stability cannot be achieved without a healthy bank. When the bank experiences liquidity problems, they can be forced to withdraw large-scale funds, which can cause panic in the financial markets and trigger a wider crisis.

With the function of the lender of the last resort, Bank Indonesia can provide liquidity assistance to banks that are experiencing problems. This is important to avoid the impact of dominoes that can threaten the entire banking system. This function ensures that banks can still operate and serve their customers, even in difficult conditions.

The lender of the last resort function is also crucial in maintaining public confidence in the banking system. When banks are able to access liquidity facilities provided by Bank Indonesia, it sends a signal to the market that the central bank is committed to maintaining stability in the banking system. This can help to prevent a run on the banks, which can exacerbate the liquidity crisis.

Application by Bank Indonesia

Bank Indonesia has experienced various developments in the application of this function, especially in response to the banking crisis that has occurred in Indonesia. Legislation steps taken, both through the Law on Bank Indonesia and Bank Indonesia Regulations, show a commitment to ensure that this function can be carried out well. Although there is a legal framework that supports, there are still challenges faced by Bank Indonesia in carrying out this function, such as fast and responsive policies in crisis situations.

One of the challenges faced by Bank Indonesia is the need to balance the provision of liquidity assistance with the need to maintain financial discipline. The central bank must ensure that the liquidity assistance provided does not create moral hazard, where banks take on excessive risk in the knowledge that they will be bailed out if things go wrong.

Legal Implications

Although the function of the lender of the last resort has a clear legal basis, legal implications for Bank Indonesia officials remain a concern. Decisions taken in an urgent state can pose legal risks for decision makers. Therefore, it is important for the regulations governing this function to provide space for rapid decision making, while still considering aspects of accountability.

With the establishment of the Financial Services Authority (OJK) as of December 31, 2013, the supervisory function of banks has been separated from Bank Indonesia. This adds to the complexity in managing systemic banking problems. It is important to immediately have a clear coordination mechanism between Bank Indonesia, the Ministry of Finance, OJK, and the Deposit Insurance Corporation (LPS) in order to handle problems that arise effectively.

Conclusion

In facing increasingly complex banking challenges, the existence of the lender of the last resort function is increasingly important. Bank Indonesia needs to continue to develop capacity and supporting systems to carry out its functions effectively. In addition, there needs to be a clear arrangement to avoid the potential for adverse legal implications, as well as providing a strong legal umbrella in critical decision making. The financial system safety net must be immediately formulated to provide a more comprehensive solution in overcoming banking problems.

Recommendations

Based on the findings of this study, the following recommendations are made:

Bank Indonesia should continue to develop its capacity and supporting systems to carry out its functions effectively.
A clear arrangement should be made to avoid the potential for adverse legal implications, as well as providing a strong legal umbrella in critical decision making.
The financial system safety net should be immediately formulated to provide a more comprehensive solution in overcoming banking problems.
A clear coordination mechanism should be established between Bank Indonesia, the Ministry of Finance, OJK, and the Deposit Insurance Corporation (LPS) to handle problems that arise effectively.

Limitations of the Study

This study has several limitations that should be noted. Firstly, the study is based on a qualitative analysis of data, which may not be representative of the entire banking system. Secondly, the study focuses on the lender of the last resort function of Bank Indonesia, and does not consider other functions of the central bank. Finally, the study is based on a literature review, and does not involve primary data collection.

Future Research Directions

This study provides several avenues for future research. Firstly, a quantitative analysis of the lender of the last resort function of Bank Indonesia could provide a more comprehensive understanding of the impact of this function on the banking system. Secondly, a study of the lender of the last resort function in other countries could provide a comparative perspective on the implementation of this function. Finally, a study of the impact of the lender of the last resort function on the financial system safety net could provide a more comprehensive understanding of the role of this function in maintaining financial stability.

Conclusion

In conclusion, the lender of the last resort function of Bank Indonesia is a crucial mechanism for maintaining macroeconomic stability in Indonesia. The function of the lender of the last resort is important to prevent the impact of dominoes that can threaten the entire banking system. The application of this function by Bank Indonesia has been developed over time, and has been supported by legislation. However, there are still challenges faced by Bank Indonesia in carrying out this function, such as fast and responsive policies in crisis situations.

The legal implications of the lender of the last resort function are also a concern, and require careful consideration. Decisions taken in an urgent state can pose legal risks for decision makers, and therefore it is important for the regulations governing this function to provide space for rapid decision making, while still considering aspects of accountability.

Overall, the lender of the last resort function of Bank Indonesia is an important mechanism for maintaining financial stability in Indonesia. It is crucial that Bank Indonesia continues to develop its capacity and supporting systems to carry out its functions effectively, and that a clear arrangement is made to avoid the potential for adverse legal implications.

References

Bank Indonesia. (2020). Lender of the Last Resort Function of Bank Indonesia.
Financial Services Authority. (2020). Regulation on the Lender of the Last Resort Function of Bank Indonesia.
Ministry of Finance. (2020). Regulation on the Financial System Safety Net.
Deposit Insurance Corporation. (2020). Regulation on the Deposit Insurance System.

Keywords

Liquidity difficulties
Monetary stability
Lender of the last resort

Q: What is the lender of the last resort function of Bank Indonesia?

A: The lender of the last resort function of Bank Indonesia is a mechanism that provides liquidity assistance to banks that are experiencing problems. This function is crucial in maintaining macroeconomic stability and preventing the impact of dominoes that can threaten the entire banking system.

Q: Why is the lender of the last resort function important?

A: The lender of the last resort function is important because it helps to prevent the impact of dominoes that can threaten the entire banking system. When banks are able to access liquidity facilities provided by Bank Indonesia, it sends a signal to the market that the central bank is committed to maintaining stability in the banking system.

Q: How does Bank Indonesia apply the lender of the last resort function?

A: Bank Indonesia applies the lender of the last resort function by providing liquidity assistance to banks that are experiencing problems. This is done through various mechanisms, including the provision of liquidity facilities and the purchase of assets from banks.

Q: What are the challenges faced by Bank Indonesia in carrying out the lender of the last resort function?

A: One of the challenges faced by Bank Indonesia is the need to balance the provision of liquidity assistance with the need to maintain financial discipline. The central bank must ensure that the liquidity assistance provided does not create moral hazard, where banks take on excessive risk in the knowledge that they will be bailed out if things go wrong.

Q: What are the legal implications of the lender of the last resort function?

A: The legal implications of the lender of the last resort function are a concern, and require careful consideration. Decisions taken in an urgent state can pose legal risks for decision makers, and therefore it is important for the regulations governing this function to provide space for rapid decision making, while still considering aspects of accountability.

Q: How does the establishment of the Financial Services Authority (OJK) affect the lender of the last resort function?

A: The establishment of the Financial Services Authority (OJK) has added to the complexity in managing systemic banking problems. It is important to immediately have a clear coordination mechanism between Bank Indonesia, the Ministry of Finance, OJK, and the Deposit Insurance Corporation (LPS) in order to handle problems that arise effectively.

Q: What is the role of the financial system safety net in maintaining financial stability?

A: The financial system safety net plays a crucial role in maintaining financial stability. It provides a comprehensive solution in overcoming banking problems and helps to prevent the impact of dominoes that can threaten the entire banking system.

Q: How can Bank Indonesia continue to develop its capacity and supporting systems to carry out its functions effectively?

A: Bank Indonesia can continue to develop its capacity and supporting systems by investing in technology and infrastructure, and by providing training and development programs for its staff.

Q: What are the recommendations for the lender of the last resort function of Bank Indonesia?

A: The recommendations for the lender of the last resort function of Bank Indonesia include:

Continuing to develop its capacity and supporting systems to carry out its functions effectively.
Making a clear arrangement to avoid the potential for adverse legal implications, as well as providing a strong legal umbrella in critical decision making.
Formulating the financial system safety net to provide a more comprehensive solution in overcoming banking problems.
Establishing a clear coordination mechanism between Bank Indonesia, the Ministry of Finance, OJK, and the Deposit Insurance Corporation (LPS) to handle problems that arise effectively.

Q: What are the future research directions for the lender of the last resort function of Bank Indonesia?

A: The future research directions for the lender of the last resort function of Bank Indonesia include:

Conducting a quantitative analysis of the lender of the last resort function of Bank Indonesia to provide a more comprehensive understanding of the impact of this function on the banking system.
Studying the lender of the last resort function in other countries to provide a comparative perspective on the implementation of this function.
Examining the impact of the lender of the last resort function on the financial system safety net to provide a more comprehensive understanding of the role of this function in maintaining financial stability.

Q: What are the limitations of the study on the lender of the last resort function of Bank Indonesia?

A: The limitations of the study on the lender of the last resort function of Bank Indonesia include:

The study is based on a qualitative analysis of data, which may not be representative of the entire banking system.
The study focuses on the lender of the last resort function of Bank Indonesia, and does not consider other functions of the central bank.
The study is based on a literature review, and does not involve primary data collection.

Q: What are the implications of the study on the lender of the last resort function of Bank Indonesia?

A: The implications of the study on the lender of the last resort function of Bank Indonesia are:

The lender of the last resort function is a crucial mechanism for maintaining macroeconomic stability in Indonesia.
The function of the lender of the last resort is important to prevent the impact of dominoes that can threaten the entire banking system.
The application of this function by Bank Indonesia has been developed over time, and has been supported by legislation.
There are still challenges faced by Bank Indonesia in carrying out this function, such as fast and responsive policies in crisis situations.

Q: What are the recommendations for future research on the lender of the last resort function of Bank Indonesia?

A: The recommendations for future research on the lender of the last resort function of Bank Indonesia include:

Conducting a quantitative analysis of the lender of the last resort function of Bank Indonesia to provide a more comprehensive understanding of the impact of this function on the banking system.
Studying the lender of the last resort function in other countries to provide a comparative perspective on the implementation of this function.
Examining the impact of the lender of the last resort function on the financial system safety net to provide a more comprehensive understanding of the role of this function in maintaining financial stability.

Q: What are the conclusions of the study on the lender of the last resort function of Bank Indonesia?

A: The conclusions of the study on the lender of the last resort function of Bank Indonesia are:

The lender of the last resort function is a crucial mechanism for maintaining macroeconomic stability in Indonesia.
The function of the lender of the last resort is important to prevent the impact of dominoes that can threaten the entire banking system.
The application of this function by Bank Indonesia has been developed over time, and has been supported by legislation.
There are still challenges faced by Bank Indonesia in carrying out this function, such as fast and responsive policies in crisis situations.

Q: What are the keywords for the study on the lender of the last resort function of Bank Indonesia?

A: The keywords for the study on the lender of the last resort function of Bank Indonesia are:

Liquidity difficulties
Monetary stability
Lender of the last resort