Bank closure no empty threat, BI signals
Bank closure no empty threat, BI signals
JAKARTA (JP): Bank Indonesia vowed to close all banks with a
capital adequacy ratio (CAR) below eight percent as at the end of
this year, asserting that it will not back down on its capital
standard requirement, even at the risk of a massive run on banks.
Bank Indonesia deputy governor Miranda Goeltom said on
Wednesday that the option to close more banks remained open.
"I've said it over and over again. We will liquidate those
(troubled) banks," Miranda said following a seminar on the
banking industry held by state-owned PT Bank Negara Indonesia
(BNI).
She dismissed criticism that the central bank was too weak in
enforcing its own regulations.
Nine banks, she said, face the threat of liquidation if they
fail to boost their CAR to at least 8 percent.
"We've told their (the banks') shareholders and management to
do something," she said.
The banks, she said, had adequate time to raise capital, seek
strategic partners or merge with stronger banks to avoid closure.
She said that, in the past two months, three banks had managed
to raise their CAR to the minimum level.
CAR measures a bank's capital against its risk-weighted
assets. Its level drops if a bank's non-performing loans
increase.
A bank classifies a loan as non-performing if interest and
debt principal installments are 90 days overdue.
To raise its CAR level, a bank must inject fresh capital or
reduce its non-performing loans.
Neither of the two options are easy now, given the ongoing
fragile economic conditions, which make raising capital difficult
and hamper loan restructuring efforts.
Miranda refused to predict which of the nine banks would most
likely face closure. "I don't want to speculate, it might stir
other perceptions," she said.
According to Bank Indonesia documents, as quoted by Dow Jones
newswire, the nine banks include PT Bank Internasional Indonesia
(BII), PT Bank Universal, PT Unibank, PT Bank IFI, PT Bank
Tabungan Pensiunan Nasional, PT Bank Artha Media, PT Bank
Swaguna, PT Bank Prima Express and PT Bang Tugu.
Thus far, the government has closed more than 60 banks since
the economic crisis struck the country in 1997.
The first wave of closures, instigated in November 1997,
destroyed the public's confidence in the banking sector,
prompting a major run on private banks.
To avoid a repeat occurrence of this predicament, in early
1998 the government issued a blanket guarantee on third-party
deposits at banks.
The blanket guarantee scheme requires the government to cover
liquidity shortfalls of banks hit by massive withdrawals or to
reimburse the depositors of closed banks.
This scheme has proven effective in minimizing the systematic
risk of bank closure.
Nevertheless, the government has been reluctant to close banks
for fear that such a drastic measure would undermine the nascent
recovery of public confidence in the sector.
The recent decision allowing state-owned PT Bank Mandiri to
acquire the financially troubled BII is seen as a way to prevent
liquidation.
Miranda said the government could mitigate the impact of bank
closures by promoting a better understanding of the benefits of
the blanket guarantee among the public.
"Most people don't want to carry all of their cash around with
them. They just want to move the money to another bank that is
safe," she explained.
Separately, SG Securities regional director Lin Che Wei
supported Bank Indonesia's commitment to liquidating banks.
He said that, since Bank Indonesia had forecast the likely
impact a bank's closure would have on other banks, the
consequences had become more predictable.
Che Wei explained that Bank Indonesia's sector mapping process
could determine whether "if one bank were closed down, it would
affect 12 other banks".
Che Wei estimated a run on banks would now be manageable,
provided the public was well informed of the government's blanket
guarantee scheme.(bkm)