April 29, 2004
April 29, 2004
Weak banking supervision
The preliminary findings of the investigations into bad
banking practices which led into the closure of two small banks
-- the Denpasar-based PT Bank Dagang Bali (BDB) and Jakarta-based
Bank Asiatic -- by Bank Indonesia on April 8 raised great doubts
about the integrity and technical competence of the central
bank's banking supervision department.
We also have great doubts about the seriousness of, and
coordination among, law enforcement agencies in dealing with
those suspected of banking crimes.
The National Police had not even been able to apprehend Bank
Asiatic's controlling owner, Ton Muk Keung, and had had to put
him on their wanted list two weeks after declaring him a suspect.
But suddenly National Police Director of Economic and Specific
Crime Division Brig. Gen. Samuel Ismoko told reporters last
Thursday that there was not enough evidence to implicate Tong in
the case.
How could the controlling owner of a bank have not been aware
of such big lending frauds at his own bank? How could such a
banker have passed the fit-and-proper test of the central bank?
Latest developments around the case also raised big questions
about the reliability of Bank Indonesia's claim that it had taken
precautionary legal measures against the directors and
shareholders of the two banks and their assets ten days before
the banks were finally closed down on April 8.
We even doubt now that the value of the assets of the banks
and their controlling owners that Bank Indonesia foreclosed on
will be sufficient to recoup the government money (read:
taxpayers' money) already used to reimburse depositors.
Bank Indonesia's Senior Deputy Governor Anwar Nasution
explained last week that the central bank should be commended for
closing the banks because the drastic measure reflected the
effectiveness of its banking supervision. He admitted, though,
that there had initially been inadequate coordination between
Bank Indonesia supervisors in Jakarta and Bali in dealing with
the two banks.
However, the results of the preliminary investigations into
the two defunct banks reveal how the management and controlling
owners of the two banks had being ignoring almost all the
regulations on prudential banking operations since 2001 and yet
the central bank failed to act firmly to resolve the problems.
We find it hard to understand why Bank Indonesia waited more
than two years after finding indications of legal lending limit
violations and the falsification of bond transactions at BDB in
mid-2001.
The central bank not only should have put the two banks under
special surveillance but also have conducted investigative
(forensic) audits on their operations as early as 2002 given that
the banks were controlled by families who are related through
marriage and the controlling shareholders had a widely
diversified range of business interests.
In most other countries, banks that are part of business
groups are always subject to special scrutiny because there are
usually pressures on the management to direct a significant
portion of their lending to associated entities, making it
extremely difficult for banking supervisors to evaluate the
credit quality of loans and collateral.
Special surveillance is also mandated in family-controlled
banks because concentrated ownership has a mostly bad influence
on management, whereas the first line of defense against unsound
banking is competent management. Bank Indonesia itself had
witnessed how BDB shareholders had so often reshuffled the bank's
management.
We also doubt the integrity of the central bank's supervisors
given their long forbearance in dealing with the two banks even
though BDB was found to have allegedly falsified documents and
made fictitious loans to bogus companies in early 2002, and
concluded fictitious transactions in corporate bonds and
negotiable deposit certificates with Bank Asiatic in early 2003
involving almost Rp 800 billion (US$95 million).
Bank Indonesia's supervisors should have known that allowing
such weak banks to continue operating entailed a serious risk
that their managements would resort to extending high-risk, high-
return loans, gambling that if they were lucky the high interest
earnings would bring their banks back to solvency.
However, as experiences in other countries has shown, such
forbearance mostly results in increasing the costs of bank
closure.
Even though the closure of the two banks has not caused panic
within the industry due largely to the blanket guarantee on bank
deposits and claims, the latest bank failures should serve as a
stronger warning to the central bank to always put family-
controlled banks and those that are part of business
conglomerates under special supervision.
The banking crimes at BDB and Bank Asiatic also make it more
imperative and urgent now than ever to remove interbank claims
from the blanket guarantee scheme.
We find it hard to understand why two of the country's largest
banks, Bank Mandiri and Bank Permata, extended respectively Rp 40
billion and Rp 10 billion in loans to the two problem banks.
The managements of these large banks should have known the
soundness of other banks they did business with. It is entirely
unfair to ask the taxpayers to underwrite the business risks
taken by bank managements in conducting interbank transactions.
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