Bailing out Bank Indonesia<\/p>\n
Bank Indonesia, the central bank, which holds the monopoly
\nover fiat money and which in 1997 and 1998 bailed out dozens of
\ncommercial banks, has officially been declared insolvent, itself
\nrequiring a bailout capital to the tune of several billion
\ndollars.<\/p>\n
How could this absurd condition befall an institution that
\nissues money, generates revenues from clearing, gets interest-
\nfree deposit reserves from commercial banks and collects income
\nfrom various other central banking services? That is surely
\nunimaginable to economics students because such a dire
\npossibility is rarely mentioned in money and banking textbooks.<\/p>\n
However mind-boggling the fact may seem, that is surely part
\nof the enormous cost of the economic crisis left behind by the
\nprevious corruption-infested governments that has to be borne by
\nIndonesian taxpayers. No technical mistakes could have incurred
\nso big a loss, however collectively incompetent the central
\nbank's board of governors might be.<\/p>\n
Central banking is supposed to be a great business. Even its
\nfunction as the lender of last resort to commercial banks, which
\nhas been blamed as the main cause of Bank Indonesia's big losses,
\nshould have racked up big revenues as emergency liquidity credits
\ncan by law only be given to illiquid, yet solvent banks, at a
\npenalty interest rate on the back of adequate collateral.<\/p>\n
But, as an investigative audit by the Supreme Audit Agency
\nfound last year, about Rp 138 trillion (US$15.1 billion) out of
\nthe Rp 144.5 trillion in emergency credits extended by Bank
\nIndonesia to commercial banks between late 1997 and early 1999
\nwould not be able to be recovered. The auditors discovered that
\nmost of the credits had not adequately been backed up by
\ncollateral, as required by law. Worse still, quite a portion of
\nthe emergency loans, supposed to be used to reimburse depositors
\nduring the massive runs on banks, had been misused by the
\nrecipient bankers for currency speculation or lending to their
\naffiliate businesses.<\/p>\n
The findings of the auditors prompted the government (finance
\nministry) not to recognize the allegedly misused Rp 138 trillion
\nof the emergency credits as its debts, threatening to withdraw
\nthe treasury bonds equivalent to that sum it has issued to the
\ncentral bank. This row has placed the legal status of the assets
\nnow held and managed by the Indonesian Bank Restructuring Agency,
\na unit of the finance ministry, in great doubt as Bank Indonesia
\nin turn has threatened to take back all the bank loans and assets
\n(collateral) from closed and nationalized banks it had
\ntransferred to the agency.<\/p>\n
It is this dispute that is about to be settled once and for
\nall on Friday after the central bank, the House of
\nRepresentatives and government complete more than five weeks of
\nnegotiations to determine how Bank Indonesia and the government
\nwill share the Rp 144.5 trillion spending.<\/p>\n
Some legislators who took part in the negotiations put the
\ncost of the central bank's recapitalization at Rp 86 trillion
\n($9.30 billion) but the central bank's acting governor Anwar
\nNasution said it would be much less or just around Rp 24
\ntrillion, depending on how much of the credits could be
\nrecovered.<\/p>\n
Whichever amount is finally agreed upon, Bank Indonesia's
\nequity capital will become negative and will either have to be
\nliquidated or recapitalized. Given the devastating repercussions
\nof liquidation, the government has chosen the recapitalization
\nalternative. After all, the Rp 144.5 trillion in emergency loans
\nhas been paid with treasury bonds and the bond interest cost has
\nbeen included in the 2001 state budget currently under House
\ndeliberation.<\/p>\n
But the recapitalization measure will provide an opportunity
\nfor the government to reshuffle the Bank Indonesia board of
\ngovernors, a job it should have done before Bank Indonesia
\nbecame, by virtue of a new central bank law, a politically
\nindependent institution in May 1999.<\/p>\n
Except for Senior Deputy Governor Anwar Nasution, who joined
\nthe central bank after passing a fit-and-proper test by the House
\nin July last year, other members of the board of governors,
\nincluding Governor Sjahril Sabirin who is now under house arrest
\nwhile awaiting trial for alleged involvement in the Bank Bali
\nscandal, were responsible for extending the controversial
\nemergency liquidity credits.<\/p>\n
True, the central bank law does not allow the government to
\ndismiss the governor or deputy governors, except when they are
\nproven guilty of crimes. But Bank Indonesia's insolvency should
\nprompt the whole board of governors to resign en masse if they
\nare truly central bankers of high integrity who uphold high
\nethical and moral standards.<\/p>\n
The recapitalization measure should not, however, slacken the
\ninvestigations by the Attorney General's Office into bankers and
\nthe central bank's executives implicated in the misuse of the
\nemergency liquidity credits.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/bailing-out-bank-indonesia-1447893297",
"image": ""
},
"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
}