BI to adopt risk-based bank supervision

BI to adopt risk-based bank supervision

JAKARTA (JP): Bank Indonesia will gradually shift its banking
supervision system from the current compliance-based mechanism to
include the internationally practiced risk-based system starting
next year, according to a senior official at the central bank.

Bank Indonesia director for banking supervision Djoko Sarwono
said that the new measure would strengthen the central bank's
banking supervision system, which has been widely criticized for
being too weak.

"We are determined to gradually implement the new supervision
system next year," Djoko told a press gathering last week.

"This is very different. It's a change in paradigm," he added.

He explained that the compliance-based supervision system was
only aimed at ensuring banks comply with Bank Indonesia
prudential regulations including legal lending limit, minimum
reserves requirement, and net open position limit.

He said that the new risk-based system would force banks to
also calculate and manage the various risks they are facing.

"We'll not abandon the compliance system. Banks must still
meet the Bank Indonesia prudential requirements. But in addition,
the banks must also be able to identify their own risks," Djoko
said.

He said that the central bank supervision would only focus on
the huge risks particularly the lending risk and market risk.

"Bank Indonesia officials will check whether the banks have
managed their risks," he said.

Indonesia's banking sector had been badly hit by the Asian
financial crisis that started in the middle of 1997. More than 66
domestic banks, out of more than 200 banks, had been shut down by
the banking authority since the crisis started.

Many have said that the weak supervision of Bank Indonesia
partly contributed to the banking crisis by allowing banks to
freely lend a huge amount of their money including that borrowed
overseas to risky businesses particularly those affiliated to the
banks.

The banking crisis has caused the taxpayers dearly as the
government had to issue around Rp 650 trillion (US$68 billion)
worth of bonds to restructure and recapitalize the banking
sector. The cost of the recapitalization alone totaled more than
Rp 430 trillion.

The state budget must cover the interest rate of the bonds,
which in 2001 will amount to around Rp 53.5 trillion.

The weak supervision of Bank Indonesia had also been blamed
for the massive abuse of government bank liquidity support
facility injected into troubled banks between 1997 and 1999
during the height of the financial crisis.

The Rp 144.5 trillion emergency loan was supposed to only be
used to reimburse depositors money during the massive bank run at
the time, but many banks had misused the facility including for
financing currency speculation and lending to affiliated
companies.

Some Rp 80 trillion of the loan had been abused by the
recipient banks.

Bank Indonesia had reached an agreement with the government to
cover around Rp 24.5 trillion of the misused loan.

Elsewhere, Djoko said that the country's banking sector had
three main agenda in the near future.

He said that the first was that banks must have a minimum
capital adequacy ratio (CAR) of 8 percent and non-performing
loans (NPLs) of below 5 percent.

He said that banks which failed to meet the target would be
put under special surveillance status for 3-6 months and if they
remained unable to meet the requirements after that period, the
banks would be liquidated.

The recapitalization program has only lifted the CAR level to
just above 4 percent. The average NPL level of domestic banks was
around 27.9 percent at the end of September.

Djoko said that the second agenda was to transfer the banking
supervision authority from the central bank to a new institution
that would also supervise other finance-related businesses
excluding the stock market by 2002.

He said that it was still uncertain whether the government and
the central bank could meet the deadline.

He said that third agenda was to end the government blanket
guarantee system, to be replaced with an insurance deposit
scheme.

He said that the first concept of the insurance deposit scheme
was expected to be completed in January, 2001.

The government launch the blanket guarantee system in early
1998 in a bid to maintain confidence in the banking sector.
Under the system the government would guarantee all of the
obligations of banks which had closed down.

Government sources, however, said that there has been
consideration to end the costly blanket guarantee program before
the 2004 deadline. (rei)