Government, BI agree on bank bailout mechanism

Government, BI agree on bank bailout mechanism

Urip Hudiono and Dadan Wijaksana, The Jakarta Post, Jakarta

The Ministry of Finance and Bank Indonesia reached an agreement
on Wednesday on a mechanism to bailout ailing banks so as to
avoid any recurrence of financial mess that resulted from the
late 1990s bank bailout program.

"In case there's another (banking) crisis, we will have a
clear system that will avoid confusion," Minister of Finance
Boediono told reporters after signing the Memorandum of
Understanding (MoU) with Bank Indonesia Governor Burhanudin
Abdullah.

The government via the central bank channeled some Rp 144.5
trillion (about US$17 billion) in emergency funds to bailout
banks facing massive runs during the late 1990s financial crisis.

But based on a state audit by the Supreme Audit Agency (BPK),
it later turned out the most of the funds had been misused or
embezzled by bank owners.

The central bank in particular came under strong criticism for
the mess as there had been no clear criteria for deciding which
banks should be bailed out. The assets surrendered by the former
bank owners, many of whom were influential businessmen during the
era of former president Soeharto, to repay the funds also turned
out to have lower market values than was initially claimed,
leaving taxpayers to cover the huge losses.

Under the MOU, which strengthens the central bank's role as
the lender of the last resort as mandated by the newly amended
Law on Bank Indonesia, the central bank will inject funds to
support troubled banks that have the potential to cause a
systemic breakdown in the overall banking sector.

The agreement will allow the setting up of a coordination
committee tasked with formulating the procedures involved in the
decision-making process, determining the amount of funds and how
they are paid, as well as designing indicators to be used in
determining whether a bank's collapse could be categorized as a
threat to the whole banking system.

The committee will be chaired by the Minister of Finance, and
have the Bank Indonesia governor as one of its members.

Other details will be regulated under ancillary regulations to
be issued by both the central bank and the Ministry of Finance.

However, a clause in the MOU states that the bailout funds
will come from the proceeds of domestic bonds to be issued by the
government, via the Ministry of Finance, and to be bought by Bank
Indonesia. The central bank can sell the bonds on the market, but
will decide on the timing to ensure optimum proceeds,

The recipients of the emergency funds will have to surrender
assets of equal value to that of the rescue package.

And, to avoid moral hazard among bankers, another clause
provides that an audit by an independent auditor will assess the
value of the surrendered assets within a maximum of six months
after the emergency funds have been disbursed.

"If the audit reveals that there is a shortfall in value, the
bankers must top the assets up, with their personal property if
necessary," the clause reads.

Elsewhere, Boediono said that the Wednesday MOU formed part of
the government's plans to set up a financial sector safety net
(FSN), which among others things includes the planned
establishment of a deposit insurance agency.

Under the current system, the government guarantees all
liabilities of banks if they are closed down by the authorities.
But when the new insurance scheme is in place, the government
will limit the guarantee, possibly to covering only individual
bank deposit of less than Rp 100 million.