Bankers robbed taxpayers

The Supreme Audit Agency's discovery that the state risks losing Rp 138.44 trillion (approximately US$16 billion), or 96 percent of the Rp 144.53 trillion in emergency liquidity loans extended by the central bank to help 48 banks stay afloat, serves only to validate what has long been suspected by analysts and the House of Representatives. Separate audits by the Government Finance Comptroller on other banks that got liquidity loans from Bank Indonesia also uncovered massive fraud and malfeasance.

The agency's investigative audit of 48 commercial banks and Bank Indonesia in relation to the extension of liquidity credits between late 1997, when the financial crisis struck Indonesia, and Jan. 29, 1999, detailed how Bank Indonesia, in collusion with bankers, violated almost all prudential rules regarding its role as the lender of last resort. What this boiled down to was a daylight robbery of taxpayers, as the loans automatically became the government's (taxpayers) debt, lest the central bank should have been liquidated for insolvency.

True, emergency liquidity credits extended within the central bank's role as the lender of last resort are normally one of two key elements that make up the financial safety net in most countries. The other element is a deposit insurance scheme, which in Indonesia was introduced in January 1998 in the form of a government blanket guarantee on bank deposits, pending the establishment of a deposit insurance institution next year.

The central bank's lender-of-last-resort role requires it promptly to provide temporary support to banks suffering liquidity problems in order to prevent panics and runs that could lead sound institutions to financial distress and precipitate their insolvency. Theoretically, this was what the central bank did when many banks were hit by massive runs between late 1997, after the closure of 16 insolvent banks, and early 1999 when the financial crisis worsened into political and social crises.

However, what the Supreme Audit Agency discovered was massive and blatant abuse of the liquidity supports by both commercial banks and the central bank. First, the central bank violated the basic rule which stipulates liquidity support can be given only to illiquid, not insolvent, banks, and that loans must be backed by adequate collateral.

As it turned out, most of the 48 banks that obtained the liquidity support were eventually closed down because they had been insolvent in the first place. Moreover, as the auditors found, many of the loans were not backed by adequate collateral and, in many cases, the amount of credits greatly exceeded the total assets of the banks receiving the credits. Many banks also were found to have misused the loans for financing derivatives transactions for dollar speculation, opening new branches, lendings to affiliated enterprises and acquiring fixed assets.

The central bank has often denied any wrongdoing, arguing that as part of the Cabinet under the authoritarian rule of former president Soeharto it had no choice but submit to the order from the president not to close banks, particularly those owned by Soeharto's cronies, even though their account balances with the central bank were negative.

Although the central bank became a politically independent institution only in May 1999, it cannot simply avoid responsibility for this massive loss to the state. The various forms of misuse of liquidity support could not have been possible without the collusion of central bank officials.

Moreover, it is questionable as to how the central bank, as the sole supervisory authority of the banking industry, could have been so blind to the true condition of so many banks that it lent support to them far in excess of the value of their assets. This smacks of collusion and cannot be written off as an honest mistake caused by the technical incompetence of supervisors.

Therefore, it is imperative that the attorney general, who also received a copy of the audit on Friday, immediately launch criminal investigations of the central bank directors in charge of the liquidity support and those bankers who misused the loans. Officials cannot simply disavow responsibility and hide behind instructions from the president. Violating the law is nothing but a crime, even if done at the order of the president. How the Attorney General's Office goes about prosecuting the culprits who stole such a massive amount of taxpayers' money will go a long way toward determining whether public trust in law enforcement and the banking industry can be restored.