Financial Stability Framework Ensures Proactive Crisis Prevention Measures

Indonesia’s top deposit insurer has dismissed fears of a potential monetary crisis, saying the country is well-prepared to avoid a repeat of the 1997–1998 financial turmoil.

Purbaya Yudhi Sadewa, Chairman of the Indonesia Deposit Insurance Corporation (LPS), emphasized the strength of early detection tools now embedded in the country’s financial oversight mechanisms.

He said LPS, as a key member of the Financial System Stability Committee (KSSK), continuously monitors economic indicators and banking sector health to mitigate systemic risks.

“I believe the likelihood of a crisis slipping through our radar is very small,” said Purbaya on Saturday in Jakarta.

Indonesia’s early warning system closely monitors economic developments

LPS has developed a real-time early warning system that tracks macroeconomic data and banking metrics with high precision.

The system enables regulators to assess potential vulnerabilities in advance and make swift interventions when necessary.

“LPS observes our economy in great detail over time, especially our banking conditions,” Purbaya told reporters at the 2025 LPS Financial Festival.

He added that this system is integrated with regular strategic reviews held within the KSSK framework, making it a dynamic and responsive tool.

This proactive approach aims to detect imbalances before they escalate into full-blown financial crises.

Inter-agency coordination key to maintaining financial system stability

The Financial System Stability Committee (KSSK) plays a central role in coordinating policy between Indonesia’s top financial authorities.

Its members include the Ministry of Finance, Bank Indonesia, the Financial Services Authority (OJK), and LPS itself.

Formed under Law No. 9 of 2016 on Financial System Crisis Prevention and Management (PPKSK), KSSK is the government’s institutional backbone for systemic risk mitigation.

“Every KSSK meeting involves reporting LPS’s observations, potential threats, and actions to be taken,” said Purbaya.

This inter-agency synergy ensures that fiscal, monetary, and prudential policies are aligned in protecting the economy.

Crisis intervention tools are now more advanced and coordinated

Compared to the 1997–1998 Asian financial crisis, Indonesia’s financial governance tools have evolved significantly in both sophistication and coordination.

In the past, slow response and fragmented oversight contributed to economic instability and mass bank failures.

Today, early intervention strategies are embedded into LPS and KSSK protocols, enabling a quicker and more unified government response.

“The instruments at our disposal are stronger than ever,” said Purbaya. “We can act before a threat materializes into a crisis.”

He stressed that the goal is no longer only about reacting to crises but actively preventing them through real-time policy adjustments..

Policy meetings include macroeconomic forecasts and financial resilience

Regular KSSK meetings allow for scenario planning and policy simulations, ensuring financial authorities are ready for multiple economic eventualities.

During these meetings, regulators assess global risks, domestic macro forecasts, and vulnerabilities in both the banking and capital markets.

LPS’s inputs are particularly valuable as they reflect real-time insights into deposit movements and bank resilience.

“This system ensures that any anomaly in financial trends will be identified early,” Purbaya said.

Such forecasting tools make it possible to implement contingency policies while preserving investor confidence and public trust.

Legal framework empowers LPS and KSSK for crisis mitigation

Indonesia’s legal framework now mandates crisis prevention as a shared responsibility among financial regulators.

Law No. 9/2016 not only formalized the creation of the KSSK but also granted it broad authority to coordinate across sectors.

This includes the legal power to intervene in troubled banks, execute recovery plans, and stabilize the financial system.

“Crisis prevention is no longer a passive task,” said Purbaya. “We are legally required to act early and act together.”

This marks a significant departure from the fragmented responses of past crises, where lack of coordination often worsened economic damage.

Stronger deposit insurance system increases public trust in banks

The role of LPS extends beyond monitoring into the domain of protecting depositors and maintaining confidence in the banking system.

By guaranteeing deposits and having crisis-resolution tools, LPS contributes directly to financial system resilience.

“Public trust is the first line of defense against panic,” said Purbaya. “If people believe their money is safe, they won’t rush to withdraw it.”

Indonesia’s current deposit guarantee covers up to Rp2 billion per account, which is among the highest in the region.

This guarantee, combined with LPS’s resolution capabilities, helps prevent the kind of bank runs that devastated economies in the late 1990s.***

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