Cleaning up banks<\/p>\n
The Indonesian Bank Restructuring Agency (IBRA) has plunged
\nimmediately into full operations following its establishment on
\nJan. 27. The agency, in cooperation with Bank Indonesia (the
\ncentral bank), is finalizing the assessment of all commercial
\nbanks and will soon be set to clear the banking industry of
\nlosses. This rapid pace of operation should indeed be the tempo
\nat which the agency works, given the magnitude of the banking
\ncrisis and the urgency of restoring public confidence in the
\nbanking system.<\/p>\n
It is encouraging to note in Sunday's joint statement from the
\ncentral bank and IBRA that bank losses would first be distributed
\namong the owners and holders of subordinated debts before the
\nproblem banks are put under IBRA's supervision. This measure is
\nessential to maintain market discipline and should be welcomed as
\na strategic law enforcement measure. In fact, we think large
\ncreditors should also be made to bear a substantial proportion of
\nbank losses. They are relatively well-informed and have more
\nresources with which to monitor bank condition.<\/p>\n
Clearing the banking system of losses is the next, logical
\nstep that should be taken by Bank Indonesia and IBRA after the
\nJan.27 decision by the central bank to guarantee rupiah and
\nforeign exchange claims on all locally incorporated commercial
\nbanks from both depositors and creditors. In a broad sense, this
\nmeans thorough reviews of bank assets.<\/p>\n
But the process of valuing bank assets has been complicated by
\nuncertainty resulting from the current macroeconomic distress.
\nValuation of bank loan portfolios is even more difficult amid
\nrapid changes in both exchange and interest rates.<\/p>\n
Given the poor quality, or lack, of financial data on bank
\ndebtors and doubts over the current and future viability of
\nindebted business ventures, valuation of bank assets would be a
\nuseful input to restructuring, only if it is conducted by
\npolitically autonomous external supervisors from the central bank
\nand IBRA.<\/p>\n
The problem, in so far as Indonesia is concerned, is that
\nmany banks are owned by politically powerful shareholders.
\nFurthermore, a high proportion of credits are often extended
\nthrough what are known as connected lendings (lending to ventures
\nundertaken by other parts of the bank's business group). This
\npractice and a lack of technical competence was partly
\nresponsible for past failings in the supervision of the banking
\nindustry. External supervisors and auditors frequently failed to
\ndetect inflated loan values and inadequate provisioning in opaque
\nfinancial data issued by banks. In other cases, competent
\nsupervisors acquiesced to political barriers and supervisory
\nforbearance.<\/p>\n
Hopefully these political barriers were removed when the
\ncentral bank was granted full autonomy in the Jan. 15 reform
\npackage agreed with the International Monetary Fund. Staff
\ncompetence can now be improved, since IBRA has freedom to recruit
\nforeign experts to assist in the execution of its task.<\/p>\n
Granting political autonomy to the central bank and IBRA, and
\nthe central bank's underwriting of claims made on all locally
\nincorporated banks, now clears the way for bolder measures to rid
\nthe banking sector of insolvent banks without great systemic
\nrisks, irrespective of the influence of their shareholders.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/cleaning-up-banks-1447893297",
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"sponsor": "Okusi Associates",
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