Urgent: Bank consolidation<\/p>\n
The government should be commended for its well-designed
\nprogram to phase out the blanket guarantee on bank deposits and
\nclaims within the next 20 months.<\/p>\n
The manner and the period of time in which the extent and
\namount of coverage under the guarantee program will gradually be
\ndecreased will allow for a smooth a transition to a deposit
\ninsurance scheme that will only cover deposits to a maximum of Rp
\n100 million (US$11,000).<\/p>\n
Certainly, there will be movements of funds from weak banks to
\nstronger ones. People will be more careful in selecting the banks
\nthey deal with, but this will speed up the consolidation of the
\nbanking industry.<\/p>\n
But unlike the period from 1997 to 1999 when funds seeking
\nsafer repositories mostly ended up at foreign banks in Jakarta or
\nbanks overseas, by February, 2004, quite a number of national
\nbanks should be strong and competitive enough to attract large
\ndepositors without the protection of a blanket guarantee.<\/p>\n
The blanket guarantee, launched in late January, 1998, at the
\nheight of the banking crisis, to prevent massive runs on banks
\nhas indeed been successful in maintaining a reasonable degree of
\npublic confidence in the fragile banking industry.<\/p>\n
However, the scheme has not only cost a huge amount of
\ntaxpayers money but also has caused \"moral hazards\" within the
\nbanking industry as market forces cannot function properly to
\nregulate banks.<\/p>\n
As of this year, the program has cost the taxpayers about Rp
\n50 trillion (US$5.5 billion), and another Rp 40 trillion in
\ngovernment bonds have been issued to replenish the guarantee
\nfund.<\/p>\n
Moreover, since the types of transactions and amounts of
\ndeposits covered by the guarantee are virtually unlimited, even
\nbankers, businesspeople and large depositors do not always feel
\ncompelled to assess the banks they deal with as they rest assured
\nthat whatever may happen to the banks, their money will be
\nreimbursed by the government.<\/p>\n
It is quite rational to select import-related and derivative
\ntransactions, bonds, loans, letters of credit and other off-
\nbalance-sheet transactions as the first to be the lifted out of
\nthe guarantee scheme next January. Companies or people involved
\nin such transactions are supposed to be resourceful and
\nintelligent enough to judge the soundness of banks they deal
\nwith.<\/p>\n
Likewise, the phasing out of inter-bank loans and deposits in
\nexcess of Rp 5 billion from the program in August, 2003, is quite
\nsensible. It is entirely unfair to use taxpayer money to protect
\nbanks or large depositors who are careless or cannot exercise
\nmarket judgment of the banks they deal with. Let them lose their
\nshirts in any bank failure.<\/p>\n
The phasing out of large deposits and most other financial
\ntransactions from the guaranteed coverage will unleash market
\nforces to regulate banks so that only the fittest will survive.
\nThis will also remove the government's contingent liabilities.<\/p>\n
The Rp 100 million ceiling on deposits to be covered by the
\ndeposit insurance scheme, which will be set up in February, 2004,
\nseems reasonable. A deposit insurance program is supposed to
\nprotect only small depositors who may not have the means to
\nanalyze the soundness of banks.<\/p>\n
After all, even though most depositors at national banks are
\nsmall savers, more than 75 percent of the estimated Rp 850
\ntrillion in third party deposits currently held by the banks are
\nowned by those of middle and top-income earners and institutions
\nwhich do have the means to assess banking risks.<\/p>\n
The most difficult part of the program will be setting the
\npremiums to be collected from banks to fund the deposit insurance
\nscheme. Given the complexity of calculating risk-adjusted
\npremiums, the government may simply impose a flat-rate premium on
\nbanks as most of the 80 or so countries, which have established a
\nsimilar scheme, have done.<\/p>\n
It is worth noting though, that a deposit insurance scheme is
\nonly one of the financial safety nets needed to prevent the
\nfinancial system from breaking down and to minimize the costs of
\nbank failure.<\/p>\n
Other financial safety instruments such as the central bank's
\nfunction as a last-resort lender and bank supervisor need to be
\nstrengthened and the procedures for the resolution of insolvent
\nbanks have to be expedited.<\/p>\n
The market cannot function properly to regulate banks and
\npeople cannot make reasonable assessments of a bank's condition
\nif the banks are not subject to stringent disclosure requirements
\nand higher standards of accountability, and if the central bank
\ndoes not have an effective bank supervision mechanism.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/urgent-bank-consolidation-1447893297",
"image": ""
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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