New central bank law to limit BI's financing facility<\/p>\n
JAKARTA (JP): The proposed central bank law, expected to be
\napproved by the House of Representatives on Monday, will limit
\nBank Indonesia's support of banks facing liquidity problems,
\naccording to a central bank executive.<\/p>\n
Achjar Iljas, a Bank Indonesia (BI) director, said on Thursday
\nthat based on the new bill, BI's \"lender of last resort\" role
\nwould be limited to providing a maximum 90 days of liquidity
\nfacilities.<\/p>\n
He said the liquidity facilities must be backed 100 percent by
\nhigh quality and liquid assets which means, during the current
\neconomic crisis, only the central bank's Bank Indonesia
\npromissory note (SBI) is acceptable.<\/p>\n
\"So current facilities will no longer be available,\" he told
\nreporters on the sidelines of a debate session on the new central
\nbank bill between the government and the House of Representatives
\ncommission VIII on finance and the state budget.<\/p>\n
He explained that the limited lending function of the central
\nbank would guarantee that past weaknesses of BI would not be
\nperpetuated.<\/p>\n
\"This is a built-in system to prevent past mistakes from
\nreoccurring,\" he said.<\/p>\n
BI's current financing facilities are divided into short-term
\nliquidity financing and long-term facilities, including
\nsubsidized loans for certain economic sectors.<\/p>\n
The central bank has been widely criticized because many of
\nits facilities have been taken advantage of by errant bankers who
\nwere not made to provide sufficient quality collateral.<\/p>\n
Analysts said the central bank might have difficulties in
\nupholding its revised lending role, as banks, especially in this
\ntime of crisis, will continue to face liquidity problems and the
\ndanger of being rushed by depositors.<\/p>\n
They pointed out that the quality SBI assets of many banks
\nwould not be enough to cover their loans from BI, which would be
\nnecessary as the sector continues to suffer from a negative
\ninterest spread due to higher interest paid on deposits than
\nearned on loans.<\/p>\n
They also said that only certain state banks and banks with
\ncapital adequacy ratios of more than 4 percent have relatively
\nhigher SBI investments as deposits were difficult to channel into
\nan economy hit by such a serious recession.<\/p>\n
\"What happens if a bank runs out of SBIs while at the same
\ntime its reserves fall into the red and needs liquidity support,
\nwill it be defaulted? Or closed down?\" questioned one analyst.<\/p>\n
\"I think BI must not be so rigid in implementing the new
\nruling,\" he said.<\/p>\n
The House of Representatives is expected to approve the new
\ncentral bank bill, which has undergone weeks of debating, on
\nMonday.<\/p>\n
The law, which will replace a 1968 law often criticized as
\nineffective, is designed to boost the independency of BI to allow
\nit to become the country's highest monetary body, free of
\ngovernment intervention to design monetary policy and supervise
\nthe flow of payments.<\/p>\n
Under the proposed law, BI's banking supervisory role would be
\ntransferred to a new independent body by the middle of 2000. This
\npart of the proposal has been under intense debate between the
\ngovernment and the House, which wanted to retain the role with
\nthe central bank.<\/p>\n
BI's role of providing subsidized loans would also be handed
\nover to a new institution. (rei)<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/new-central-bank-law-to-limit-bis-financing-facility-1447893297",
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