Moral hazard<\/p>\n
Bank Global's operations have been frozen. For many people, this
\nnews came without warning. Although Bank Indonesia has had the
\nbank under supervision since late October because of its
\ndeteriorating financial condition, it was not until late November
\nthat information about Bank Global's problems began to leak out.<\/p>\n
It started with news reports that some of the bank's mutual
\nfund customers were unable to withdraw their money. The bank's
\nmanagement issued a classic denial, swearing its finances were
\nsound. But eventually the truth came out that the bank was
\ninsolvent, possibly bankrupted by its management or owners, with
\na police investigation expected to determine the exact cause of
\nthis case.<\/p>\n
All of the reports coming out about Bank Global are worrying.
\nThey describe a combination of alleged financial engineering to
\nmake the bank's finances look good, suspected criminal acts in
\nthe extension of unsound credits, the manipulation of mutual
\nfunds and a lack of supervision from the authorities.<\/p>\n
This is not the first time since the wave of bank closures in
\nthe late 1990s that the authorities have been forced to freeze a
\nbank's operations because of suspected criminal acts.<\/p>\n
In April this year, the central bank closed down two small
\ncommercial banks, Bank Dagang Bali (BDB) and Bank Asiatic. The
\ntwo banks -- owned by two families related by marriage -- became
\ninsolvent as a result of illegal transactions involving massive
\nlending to companies affiliated to the owners.<\/p>\n
Nevertheless, the case of Bank Global is more disturbing
\nbecause it is a publicly listed company. In practice, public
\nbanks like Bank Global should be more closely supervised by Bank
\nIndonesia, the Stock Market Supervisory Board, the Jakarta Stock
\nExchange and public accountants. The fact that Bank Global found
\nitself in such a dire financial position as a result of
\nsuspected criminal acts is beyond comprehension.<\/p>\n
It is very simple to look at this case and arrive at this
\nconclusion: if this could happen at publicly listed Bank Global,
\nit could easily happen at any bank, particularly those family-
\nowned banks whose primary purpose is to finance the families'
\nbusinesses -- despite the legal lending limit.<\/p>\n
It is troubling to consider the consequences of Bank Global's
\ntroubles, especially on smaller local banks. People are now more
\nlikely to think twice about putting their money in less
\nreputable, smaller banks. Banking is a business of trust. Once
\nthe public no longer trusts a bank, that bank cannot survive.<\/p>\n
Therefore, we expect the authorities to take action to restore
\npublic confidence in local banks, especially smaller ones. The
\ngovernment's blanket guarantee scheme for bank deposits is
\nhelpful in preventing the carefully built edifice of public
\nconfidence from crumbling.<\/p>\n
However, the government must also stand by its own policy of
\nguaranteeing bank deposits but not mutual funds, because people
\nhave to learn that investments carry risks. This way, people will
\ninvest more prudently.<\/p>\n
The next goal for authorities handling the Bank Global case
\nshould be to minimize the losses to the state. In past bank
\nclosures, the state always bore the lion's share of the losses,
\nwhile bank owners were allowed to run away unpunished and
\nunrepentant.<\/p>\n
The government has said it will seize the private assets of
\nthe owners of Bank Global to help cover any losses to the state,
\nbut the real test will come when the government has to act on
\nthis promise. Punishing those responsible for Bank Global's woes
\nis surely an important step in rebuilding public confidence.
\nOtherwise, it will create a moral hazard for bankers and bank
\nowners alike.<\/p>\n
In the future, tighter supervision of banks is necessary
\nconsidering the information gap in this industry, especially with
\nthe banking secrecy clause. Most people are kept in the dark
\nabout the financial condition of their banks. Laymen cannot
\nexamine every nook and cranny of banks' financial reports. It is
\nthe responsibility of regulators to keep a close eye on any
\ntransactions that even hint at a conflict of interest.<\/p>\n
Most of all, banking authorities must work to improve the
\nhealth of the industry. With 135 banks currently operating in the
\ncountry, it is safe to say some of them are operating
\ninefficiently. The authorities must help, or if necessary force,
\nsmaller, less healthy banks to merge or find suitable investors
\nto inject fresh funds into the banks. Otherwise, we can expect to
\nbe surprised by yet more bank defaults.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/moral-hazard-1447899208",
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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