Rating bank soundness<\/p>\n
The new rules enacted by Bank Indonesia last week on the
\nrating of the soundness of commercial banks are designed to
\nstrengthen the foundation of the banking system, even to the
\nextent of banishing a number of the 239 banks now operating.<\/p>\n
The tougher requirements for achieving a sound rating will
\nforce bank owners to increase their equity capital, thereby
\nstaking out more of their own assets. If the bankers are not
\nwilling or not able to do so they will have to merge their banks
\nto survive in the market. The new rulings also put stronger
\npressure on bank managements to hold firmly to prudential
\noperations.<\/p>\n
Banks which fail to achieve a sound rating will eventually be
\nedged out of the market because they will be shunned by the
\npublic and the central bank will deny them the permits
\nto expand branches and upgrade to foreign exchange banking
\noperations. But a quicker process of getting rid of unsound
\nbanks, irrespective of the political backing of their owners, is
\nstill needed to give stronger teeth to the recent government
\nregulation on the procedures for bank liquidation.<\/p>\n
Bank Indonesia apparently believes there are now too many
\nsmall and weak banks which, if allowed to operate in their
\ncurrent condition, could affect the public's trust in the banking
\nindustry. Unlike other kinds of businesses, a bank failure can
\nset off systemic risks with far-reaching repercussions on
\nmonetary stability. In fact, the central bank is now coping with
\na number of problem banks.<\/p>\n
The new rating rules should be seen as part of an ongoing
\nreform process conducted by the central bank to further
\nconsolidate the banking industry and remove the excesses of the
\n1988 massive banking deregulation which has almost doubled the
\nnumber of banks to 240 at present.<\/p>\n
The rating remains based on international standards such as
\ncapital adequacy, asset quality, management, liquidity, legal
\nlending limits and net open position in foreign exchange but
\nrealigns the emphasis on several indicators to obtain a more
\nreliable assessment of soundness.<\/p>\n
For example, the yardsticks to assess the quality of assets
\nwere amended to prevent banks from carrying assets of a
\nquestionable quality. The objective is quite obvious. It is not
\nonly misleading to the general public but also meaningless for
\nassessing soundness if banks are allowed to book loans or
\ninvestment in securities which are not backed up with sufficient
\nprovisions. Further down the line, the capital standards of a
\nbank are also influenced by the quality of its assets. A capital
\nadequacy ratio will have no meaning at all if the ratio is based
\non assets whose quality is doubtful.<\/p>\n
Legal lending limits or related-party lending -- lending
\ndirectly or indirectly to borrowers associated with the
\nshareholders -- have been given stronger scrutiny. This
\napparently has been prompted by the central bank's experiences
\nwith problem banks. Most of the problem banks have been driven to
\nfinancial distress not by fiercer competition but by plundering
\nby their own majority shareholders who made or countenanced
\nunwise lendings to their own business group.<\/p>\n
The latest case in point is the almost bankrupt Bank Pacific
\nwhich is still in the process of being bailed out by the central
\nbank through a merger or acquisition by new investors. The new
\nrules also pay more attention to the quality of financial reports
\nby downgrading the rating of banks found to make window dressing
\nto embellish their bottom line.<\/p>\n
The new rules therefore should not be seen as restrictive
\nregulations amid the current era of deregulation but as much-
\nneeded prudential principles to improve the international
\ncompetitiveness of the banking industry. With economies
\nincreasingly interdependent and huge capital flows, disruption to
\na national banking system poses a risk to the entire
\ninternational financial system.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/rating-bank-soundness-1447893297",
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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