Muliaman Hadad said he was very concerned about unease caused by the euro zone debt crisis spreading to consumer expectations, given Southeast Asia's largest economy is mostly driven by domestic demand from the world's fourth largest population.
"We did some kind of stress-testing — let's say if Portugal goes down then what happens to our banking, if Spain goes down, if all goes down — the total exposure is quite minimal," Hadad, responsible for banking regulation, said in an interview on Friday.
He said domestic banks' exposure to Europe and the United States was 100 trillion rupiah ($11.1 billion), including letters of credit, or 4.7 percent of total assets. The country's largest lenders are Bank Mandiri, BCA and Bank Rakyat Indonesia.
Domestic liquidity would be "still OK" if Western trade credit was pulled from the country, said the 51-year-old career central banker.
Indonesian markets have been volatile in recent weeks on investor worries over euro zone debt, leading the central bank to intervene to prop up a weakening rupiah this week. Southeast Asia's largest economy had earlier this year been attracting strong portfolio flows.
"We're very concerned about the next round of the crisis," Hadad said, adding he was still optimistic on the fundamentals of the country's economy and did not see global turmoil turning out as bad as during the 2008 credit crisis.
Hadad said the focus for the central bank, which unexpectedly slashed its benchmark rate by 50 basis points to a record low of 6 percent earlier this month and next meets on Dec. 8, should now become interpreting and maintaining financial stability.
"It's a new era of central banking," said Hadad, who will face lawmakers in parliament in early December for tests himself to be re-appointed as a deputy governor since his current term is ending.
This focus meant new regulations mooted earlier this year to limit bank ownership to improve the governance in the sector were unlikely anytime soon. The details of the rule, such as whether state banks would be exempted, were still being discussed, Hadad said.
The central bank said in August it was temporarily barring takeovers in the banking sector pending implementation of the rule, which has already scuppered some cross-border deals as investors sought clarity, while existing owners worried they may have to sell up.
"We are very busy with the European situation. I don't want to trigger something unnecessary, or unintended consequences," he said, adding it was better investors waited for clarity, in comments that are likely to prolong takeover uncertainty.
However, he said investors were still eyeing a sector with high returns on assets and equity and current loan growth of around 25 percent, in a country touted as one of the world's most promising emerging markets.
"Indonesian banking is like a beautiful lady ... everybody is looking of course," he said.
