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.