Indonesia's New Deposit Guarantee Law

The blanket guarantee introduced in 1998 in response to the emerging banking and economic crisis resulted in $50 billion of losses to the general public. The government has now introduced a law that enables the phasing out of this blanket guarantee, but which also allows for its reinstatement in the event of any threatened collapse of the banking system. Rather than eliminating the possibility of any repetition of the previous banking disaster, the new law effectively mandates an almost identical approach to handling system-wide banking collapses in the future, suggesting that the authorities and their advisers learned very little from the recent bitter experience. It is argued here that the crucial starting point for formulating policy in this field is to correctly specify the exact purpose that government intervention is intended to serve: namely, the avoidance of major macroeconomic disruption as a result of bank failures.