Banking moral hazard<\/p>\n
The closure of two small banks -- Denpasar-based PT Bank
\nDagang Bali (BDB), owned by I Gusti Made Oka, and Jakarta-based
\nBank Asiatic, owned by Tong Muk Keung -- by Bank Indonesia on
\nThursday due to insolvency is not likely to cause a major panic.
\nNor will the drastic measure damage the public's trust in the
\nbanking industry, which will contribute to facilitating an
\norderly exit of the banks from the financial system.<\/p>\n
With combined liabilities of only Rp 3.4 trillion (US$400
\nmillion) and third party deposits of Rp 2.2 trillion the closure
\nof the family-owned banks do not pose a risk on the stability of
\nthe banking industry, which had a total asset of Rp 1,115.6
\ntrillion (US$131.5 billion) as of January.<\/p>\n
As the government's blanket guarantee on deposits and claims
\nremains effective at least until next January, depositors can
\nrelax and wait for the reimbursement of their savings.<\/p>\n
Nevertheless, it is still mind boggling to learn from Bank
\nIndonesia's press statement as to how brazenly the two families
\nhad been robbing their own banks through related party lending,
\nfabrication of asset records and fictitious credit records.<\/p>\n
It is also shocking to learn that the two banks had been used
\nas nothing more than the treasuries of the controlling families'
\nbusinesses.<\/p>\n
The fact that the two families are also related by marriage --
\nMade Oka's son to Tong's daughter -- only made conditions perfect
\nfor collusion. All they needed to do was simply throw the
\nprinciples of good governance and prudential banking regulations
\nout of the window.<\/p>\n
Bank Indonesia said it had placed the two banks under special
\nscrutiny for the past year and had provided technical guidance
\nand assistance to improve their performance, but to no avail.<\/p>\n
Bank analysts also revealed how Bank Asiatic had been engaged
\nin go-go lending over the past year, expanding its loan portfolio
\nby sixfold, while its deposit base growth was moderate at best.<\/p>\n
The insolvency of the banks and the bad banking practices that
\ncaused their failure demonstrate, once again, that the banking
\nindustry -- still reeling from the devastating 1997-1999 banking
\ncrisis -- remains vulnerable to mismanagement and fraud.<\/p>\n
Made Oka and Tong should have known that their behind-the-
\nscenes wrangling would not go undetected by Bank Indonesia, which
\nhas steadily improved the integrity and capability of its bank
\nsupervision department after the outbreak of the banking crisis.<\/p>\n
That the two families still deigned to abuse funds in their
\nbanks shows a high degree of moral hazard within the banking
\nindustry, which comes as no surprise because almost none of the
\nbig bank owners who were directly or indirectly responsible for
\nthe country's 1997 economic crisis have been incarcerated.<\/p>\n
Bank Indonesia's closure of the two banks should be welcomed
\nas the right move to clean the industry of bad banks and bad
\nbankers. However, it is still too early to judge as to whether
\nthe draconian measure had been timely or whether it should have
\nbeen taken much earlier.<\/p>\n
Further developments in the handling of the two defunct banks
\nover the next few weeks also will tell us as to whether the
\ncentral bank's supervision mechanism is capable of providing an
\nearly warning on the condition of each of the remaining 136
\ncommercial banks.<\/p>\n
We could say the supervision mechanism had been fairly
\neffective if the government is able eventually to recoup a good
\nportion of the Rp 2.2 trillion -- which the finance ministry will
\nlikely need to draw from the emergency fund to reimburse
\ndepositors of the closed banks under the blanket guarantee
\nprogram.<\/p>\n
It is a comfort to learn that the central bank had taken
\nprecautionary legal recourse against the directors and owners of
\nthe banks and their personal assets before it finally revoked
\ntheir licenses.<\/p>\n
This means that litigation against the banks' directors and
\nowners and foreclosing their personal assets is likely to proceed
\nsmoothly, as none of those suspected of being directly
\nresponsible for the banks' failure have disappeared or fled
\noverseas.<\/p>\n
Learning from the bitter experiences of the 1997-1999 banking
\ncrisis, however, the finance ministry and Bank Indonesia should
\nbe extremely careful in assessing the eligibility of deposits and
\nclaims to reimbursement under the blanket guarantee.<\/p>\n
In addition, to minimize moral hazard, the government should
\nsee to it that the shareholders of the closed banks lose every
\nlast cent of their investment -- so that they bear the full brunt
\nof their failure before taxpayers are burdened with even part of
\ntheir losses.<\/p>\n
_____________<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/banking-moral-hazard-1447893297", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }