Fraud guaranteed

Fraud guaranteed

The alleged plundering of almost US$80 million from Bank Bali
revealed two major flaws which, if not removed, may abort the
budding recovery of Indonesia's economy.

First of all, the government blanket guarantee of bank
deposits and claims, though succeeding in preventing the whole
banking system from a total collapse, is killing market
discipline and causing moral hazards among bank managers, owners
and depositors. Political leaders need to act efficiently and
prudently.

The guarantee system seems to be defective in its design. The
almost unlimited categories and sums of bank deposits and claims
the scheme covers and the loosely written rules on its
implementation have made the scheme widely open to abuse. Since
the scheme is funded entirely by the state budget, the costs and
losses are fully borne by taxpayers. Thus far the government has
issued Rp 53.8 trillion ($6.9 billion) in treasury bonds to
finance the guarantee scheme but, given the persistently shaky
condition of most banks, the costs will most likely increase
further.

The defect was initially understandable as the blanket
guarantee scheme was launched in a panic response to the massive
runs on banks in January 1998, triggered by the loss of public
trust in the poorly managed, inadequately supervised and
corruption-ridden banking system.

It is in fact the artificial respiration provided by the
guarantee system that has caused the domestic banking industry to
stay alive now even though most banks are technically bankrupt
with negative capital. Without the government guarantee, no one
would be willing to deal with domestic banks.

But the government should have realized by now, more than 18
months after the introduction of the scheme, that without market
discipline, the banking reform will never succeed in creating
sound banks. And market discipline will never be restored if the
scheme is not revised to minimize moral hazards.

We would not go as far as Amien Rais, chairman of the National
Mandate Party, who demanded total abolition of the guarantee
scheme, because such a drastic move would immediately lead the
ailing banking system into a total collapse. But revision is most
imperative. As we have suggested several times here before, a
ceiling should be imposed on the sums of deposits covered by the
scheme and interbank transactions should be excluded from the
guarantee system to impose market discipline.

The rationale is that people who are adequately resourceful to
analyze banking conditions, and able to collect banking
information from analysts, should be allowed to exercise market
judgment as to which banks they deal with. Likewise, bankers
should be allowed to lose their shirts if they don't know the
soundness of banks they make transactions with. Why should
taxpayers be punished for the wrongdoings of unscrupulous
bankers?

Here is the second appalling flaw. The Bank Bali scandal
validates the public's fear that little has changed in the way of
public and corporate governance. Poor management, corruption and
the central bank's incompetent and highly venal supervision,
which precipitated the explosion of Indonesia's banking crisis in
late 1997, remain the biggest problems in the banking industry.
Any incipient confidence in the $70 billion bank restructuring
program under tight supervision of the International Monetary
Fund turned out to be false.

The questionable deal that involved almost one-third of Bank
Bali's total assets of Rp 10.01 trillion as of January caught the
attention of the Indonesian Bank Restructuring Agency, Bank
Indonesia, the finance ministry and the Capital Market
Supervisory Agency (securities commission) only seven months
later. Had Standard Chartered Bank not uncovered the big hole in
Bank Bali's assets in the course of its due diligence, made in
light of its plan to acquire 20 percent of the bank, the affair
might have remained unknown. Had it not been for banking analyst
Pradjoto's moral courage to reveal the scandal to the media, the
scam would have been covered up by those in power.

One would then wonder that if the level of disclosure,
transparency and accountability of publicly listed Bank Bali
turns out to be so abysmal, the quality of corporate governance
in other business entities must be maddeningly much worse. This
is because Bank Bali, like all other financial institutions which
mobilize funds from the public, is supposedly subject to tighter
disclosure requirements in view of its fiduciary responsibility
and the fact that it is owned by tens of thousands of investors
through the stock exchange.

The government still seems oblivious to the alarming market
bell. The sudden steep fall in the rupiah rate over the last two
days, despite the positive macroeconomic indicators over the last
few months, reflects the market assessment of the bombed-out
state of our law enforcement and public and corporate
transparency and accountability.