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)