Rescuing banks<\/p>\n
The banking industry, which lies at the root of Indonesia's
\neconomic crisis, and the central bank are now mired in a vicious
\ncircle.<\/p>\n
The government's blanket guarantee for foreign exchange and
\nrupiah depositor and creditor claims on locally incorporated
\nbanks has been causing moral hazards not only throughout the
\nindustry but also for the bank supervisory mechanism and
\ndepositors. The guarantee, provided in late January to prevent
\nbanking panics and runs, has overtaxed the role of the central
\nbank, Bank Indonesia, as the lender of last resort. It has
\nunintentionally forced the central bank to provide liquidity
\nsupport not only to illiquid but solvent banks, but also to
\noutright insolvent ones.<\/p>\n
We expected the central bank and the Indonesian Bank
\nRestructuring Agency (IBRA) to act quickly and firmly on
\ninsolvent banks as soon its across-the-board guarantee was put in
\nplace because the risk of massive panics would be minimized.<\/p>\n
But it is now painfully apparent that it is the central bank
\nthat is now in a panic, making huge liquidity injections into
\nbanks without proper evaluations of their assets and operational
\nviability. The latest official reports show that as of June 5,
\nBank Indonesia has pumped Rp 132 trillion (US$12 billion) in
\nliquidity credits into problem banks, up from Rp 101 trillion
\nearly last month. The total does not include liquidity injections
\nto illiquid banks which are still sound enough to evade the IBRA
\nhospital.<\/p>\n
This anomaly is eroding market discipline among banks and
\ncutting into the profitability of the banking industry as
\ninsolvent institutions are allowed to remain afloat to compete
\nwith solvent ones.<\/p>\n
Likewise, large depositors and creditors, who are supposed to
\nhave more resources and are better informed of bank conditions,
\nalso seem affected by the moral hazard. They have become lax in
\nenforcing market discipline on weaker banks because they feel
\nsecure that the guarantee scheme will bail them out of any
\ntrouble.<\/p>\n
Worse still, the establishment of IBRA in late January, when
\nthe blanket guarantee was announced, has caused both a moral
\nhazard at the central bank and dualism in bank supervision. IBRA
\nis in charge of supervising and managing problem banks, while the
\ncentral bank is to handle what are classified as sound banks.
\nBut the intensity and quality of the central bank's supervision
\nof banks under its purview seems to have declined since it can
\nnow simply dump problem banks onto IBRA.<\/p>\n
As the amount of bad credit steadily increases due to the
\nbattered economy and punitive lending rates as high as 70
\npercent, the quality of most bank assets has been deteriorating
\nas well. This has raised concerns that the central bank or IBRA
\nmight not be able to recoup the huge liquidity credits already
\npumped into the banking system.<\/p>\n
Contrary to official optimism, most analysts do not expect, at
\nleast until political uncertainty is removed, any significant
\nstrengthening of the beleaguered rupiah. Without a stronger
\nrupiah, the high interest rates will most likely be maintained
\nwith devastating effects on both businesses and banks.<\/p>\n
Recapitalization seems now the most effective and quickest way
\nof restructuring the ailing banks. But not a single domestic
\ninvestor is capable or likely willing to invest in the crippled
\nbanking industry since most large business groups, which are
\nthemselves major shareholders in most banks, are being
\noverburdened with foreign debts. Foreign capital inflow or a
\nreturn of Indonesian capital, which fled overseas after the
\nrecent riots in Jakarta and other areas, is not a prospect
\neither.<\/p>\n
The outlook is quite grim indeed. As the capital base of most
\nbanks erodes and with a virtual stop in new lending, more banks
\nwill eventually be forced to enter IBRA care, which is now
\ntending to more than 45 distressed banks.<\/p>\n
Given the severe banking crisis and the blunt fact that its
\nresolution is crucial for the stabilization of the rupiah at a
\nreasonable level, it is high time for both the central bank and
\nIBRA to act firmly and quickly on insolvent banks. Allowing them
\nto stay afloat with additional liquidity credits not only makes
\nit more difficult to strengthen the whole banking industry but
\nalso risks wasting a huge sum of public funds and further
\nhyperinflation.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/rescuing-banks-1447899208",
"image": ""
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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