April 29, 2004<\/p>\n
Weak banking supervision<\/p>\n
The preliminary findings of the investigations into bad
\nbanking practices which led into the closure of two small banks
\n-- the Denpasar-based PT Bank Dagang Bali (BDB) and Jakarta-based
\nBank Asiatic -- by Bank Indonesia on April 8 raised great doubts
\nabout the integrity and technical competence of the central
\nbank's banking supervision department.<\/p>\n
We also have great doubts about the seriousness of, and
\ncoordination among, law enforcement agencies in dealing with
\nthose suspected of banking crimes.<\/p>\n
The National Police had not even been able to apprehend Bank
\nAsiatic's controlling owner, Ton Muk Keung, and had had to put
\nhim on their wanted list two weeks after declaring him a suspect.
\nBut suddenly National Police Director of Economic and Specific
\nCrime Division Brig. Gen. Samuel Ismoko told reporters last
\nThursday that there was not enough evidence to implicate Tong in
\nthe case.<\/p>\n
How could the controlling owner of a bank have not been aware
\nof such big lending frauds at his own bank? How could such a
\nbanker have passed the fit-and-proper test of the central bank?<\/p>\n
Latest developments around the case also raised big questions
\nabout the reliability of Bank Indonesia's claim that it had taken
\nprecautionary legal measures against the directors and
\nshareholders of the two banks and their assets ten days before
\nthe banks were finally closed down on April 8.<\/p>\n
We even doubt now that the value of the assets of the banks
\nand their controlling owners that Bank Indonesia foreclosed on
\nwill be sufficient to recoup the government money (read:
\ntaxpayers' money) already used to reimburse depositors.<\/p>\n
Bank Indonesia's Senior Deputy Governor Anwar Nasution
\nexplained last week that the central bank should be commended for
\nclosing the banks because the drastic measure reflected the
\neffectiveness of its banking supervision. He admitted, though,
\nthat there had initially been inadequate coordination between
\nBank Indonesia supervisors in Jakarta and Bali in dealing with
\nthe two banks.<\/p>\n
However, the results of the preliminary investigations into
\nthe two defunct banks reveal how the management and controlling
\nowners of the two banks had being ignoring almost all the
\nregulations on prudential banking operations since 2001 and yet
\nthe central bank failed to act firmly to resolve the problems.<\/p>\n
We find it hard to understand why Bank Indonesia waited more
\nthan two years after finding indications of legal lending limit
\nviolations and the falsification of bond transactions at BDB in
\nmid-2001.<\/p>\n
The central bank not only should have put the two banks under
\nspecial surveillance but also have conducted investigative
\n(forensic) audits on their operations as early as 2002 given that
\nthe banks were controlled by families who are related through
\nmarriage and the controlling shareholders had a widely
\ndiversified range of business interests.<\/p>\n
In most other countries, banks that are part of business
\ngroups are always subject to special scrutiny because there are
\nusually pressures on the management to direct a significant
\nportion of their lending to associated entities, making it
\nextremely difficult for banking supervisors to evaluate the
\ncredit quality of loans and collateral.<\/p>\n
Special surveillance is also mandated in family-controlled
\nbanks because concentrated ownership has a mostly bad influence
\non management, whereas the first line of defense against unsound
\nbanking is competent management. Bank Indonesia itself had
\nwitnessed how BDB shareholders had so often reshuffled the bank's
\nmanagement.<\/p>\n
We also doubt the integrity of the central bank's supervisors
\ngiven their long forbearance in dealing with the two banks even
\nthough BDB was found to have allegedly falsified documents and
\nmade fictitious loans to bogus companies in early 2002, and
\nconcluded fictitious transactions in corporate bonds and
\nnegotiable deposit certificates with Bank Asiatic in early 2003
\ninvolving almost Rp 800 billion (US$95 million).<\/p>\n
Bank Indonesia's supervisors should have known that allowing
\nsuch weak banks to continue operating entailed a serious risk
\nthat their managements would resort to extending high-risk, high-
\nreturn loans, gambling that if they were lucky the high interest
\nearnings would bring their banks back to solvency.<\/p>\n
However, as experiences in other countries has shown, such
\nforbearance mostly results in increasing the costs of bank
\nclosure.<\/p>\n
Even though the closure of the two banks has not caused panic
\nwithin the industry due largely to the blanket guarantee on bank
\ndeposits and claims, the latest bank failures should serve as a
\nstronger warning to the central bank to always put family-
\ncontrolled banks and those that are part of business
\nconglomerates under special supervision.<\/p>\n
The banking crimes at BDB and Bank Asiatic also make it more
\nimperative and urgent now than ever to remove interbank claims
\nfrom the blanket guarantee scheme.<\/p>\n
We find it hard to understand why two of the country's largest
\nbanks, Bank Mandiri and Bank Permata, extended respectively Rp 40
\nbillion and Rp 10 billion in loans to the two problem banks.<\/p>\n
The managements of these large banks should have known the
\nsoundness of other banks they did business with. It is entirely
\nunfair to ask the taxpayers to underwrite the business risks
\ntaken by bank managements in conducting interbank transactions.<\/p>\n
---------<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/april-29-2004-1447899208", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }