BCA run indicates crisis of confidence

BCA run indicates crisis of confidence

Bank Central Asia (BCA) suffered a rush over the weekend
following a rumor that its Singapore branch had been closed and
that its founder and major shareholder, Liem Sioe Liong, had
passed away. Banking analyst Laksamana Sukardi looks into the
phenomenon.

Question: The government has said it would not liquidate
another bank following the liquidation of 16 insolvent banks
recently and yet the public reaction was frantic when hearing
rumors about BCA. Why is that so?

Answer: The recent collective closure of commercial banks
has created a negative psychological impact on the public and has
conditioned depositors to panic easily, while the lawsuit filed
by shareholders of two of the liquidated banks (Bank Andromeda
and Bank Jakarta) has affected the reputation of the government.

Q: Will there be any such rushes in the future?

A: I think banks should prepare themselves to face possible
rushes in the future because there is still a big potential for
depositors to lose their trust in our banks. Rushes can even
occur with healthy banks because depositors, who do not trust the
banking industry, can no longer think soundly. Furthermore,
Indonesian commercial banks are very shaky because their funds
are mostly short-term in nature, while their loans are generally
long-term. Such a poor liquidity structure makes banks very
sensitive toward any rumors. If depositors trusted their banks,
they would save their money over the long-term and they,
therefore, would not withdraw their deposits before long-term
maturation dates for their savings came due.

Q: What rumors might trigger depositors to run on their banks?

A: Rumors on the soundness of banking operations and the health
conditions of banking shareholders like Mochtar Riady and Liem
Sioe Liong will be more sensitive than those on the health of
government officials other than President Soeharto. Political
turmoil will have no impact on the banking industry unless it is
combined with a crisis in economic confidence.

Q: What measures should commercial banks take if they are
affected by a rush?

A: Not a single bank, however healthy it is, would be strong
enough to face a public rush because of their poor liquidity
structure. Banks, therefore, should cooperate hand-in-hand and
help each other whenever a rush occurs.

Q: How can the recurrence of such a rush be prevented in the
future?

A: Each bank should announce its measures aimed at improving the
healthiness of its operations, such as an increase in its
capital, its plans to merge with another bank and the
diversification of its shareholding. In short, banks should be
able to prove that they can be trusted. Banking is a business of
trust.

The government should also encourage banks to improve the
soundness of their operation by issuing new structural
regulations requiring them to diversify their ownership so that
the mechanisms of self-control and internal supervision can be
enforced, and to disclose their management to the public.

The government should also require banks to increase their
capital because the current minimum level (Rp 150 billion or
US$43.4 million for a foreign exchange bank) is such a small
amount that a single investor could easily become a majority
shareholder in a bank.

Q: Given the fragile state of our banking system, what are the
prospects of competing with foreign banks in a free market as
required by the Asia-Pacific Economic Cooperation forum in the
near future?

A: I think we will not be able to compete against foreign rivals
unless our banks take immediate steps to improve the prudence of
their operations, while the government improves its image.

The recent liquidation of the 16 insolvent banks actually
indicates the poor law enforcement by the government, not the
bankruptcy of their shareholders.

In other countries, the bankruptcy of a bank usually coincides
with the bankruptcy of its shareholders. In Indonesia, even
though the 16 banks were declared bankrupt, their shareholders
will remain rich. The shareholders of Bank Pacific, Bank
Andromeda, Bank Harapan Sentosa and Bank Jakarta, for example,
are still rich.