Government urged to set banks' CAR at 16 percent

JAKARTA (JP): The government should set ambitious requirements for banks' capital adequacy ratios (CAR) -- the basic measure of a bank's health -- high enough to allow only serious bankers to remain in the banking industry, according to Australian economist Ross H. McLeod.

McLeod suggested here on Friday that local banks' CAR be set at 16 percent for the near term, which would be twice the international standard of 8 percent set by the Basle, Switzerland-based Bank for International Settlements.

CAR is the ratio of equity capital to risk-weighted assets.

McLeod explained that the high CAR requirement would encourage separation in terms of ownership between the banking sector and the real sector.

"Only serious and professional bankers would invest in the banking industry, while conglomerates in the real sector will likely back off from banking and concentrate in their core original sectors.

"High CAR requirements would also encourage banks' owners and management to manage public funds carefully because they also risk their big capital put in the bank," McLeod said at a seminar hosted by the Center for Strategic and International Studies.

He said the 4 percent CAR requirement currently set by the government would still very likely create "moral hazards" among bankers.

"I understand that fulfilling even the 4 percent CAR is still hard for most bank owners. But I think the government should set an ambitious level of CAR to prevent moral hazards among bankers," he said.

Under its bank recapitalization program, the government is trying to boost the CAR of commercial banks to 4 percent by the end of June.

The government also requires that all surviving banks maintain CAR of 8 percent by the end of this year and 10 percent by the end of 2000.

McLeod on Friday also criticized the government's recapitalization program as lacking in transparency.

"Even the basic question of how much the government's ownership of those recapitalized banks will be is still very unclear to me," he said.

The funding mechanism of the recapitalization program was also still unclear, he added.

McLeod also expressed concerns over the prevailing negative spread in the banking industry which he said could undermine the recapitalization program.

Negative spread occurs when the interest banks pay on deposits is higher than lending rates they charge debtors.

The only way to deal with this loss-making situation is to bring down deposit rates and empower corporations so they can afford bank loans with reasonable rates.

Another important element to strengthen the banking industry, according to McLeod, is to ensure that bankruptcy proceedings work well.

Without an effective bankruptcy procedure, he said, banks cannot recover their loans from defiant debtors.

"So, an effective bankruptcy court is important to give a threat to errant debtors that they must pay their debt or be declared bankrupt," he said.

He noted that the performance of the new commercial court has been disappointing for foreign creditors who want to get back a portion of their investment in the country.

"I believe there are many corporations which are actually capable of paying something to their creditors but deliberately do not do it simply because they know the court system is weak here," he said.

He suggested that the government take a lead in strengthening the commercial court by filing bankruptcy petitions against major errant debtors of state banks at the court.

"By bringing big debtors of state banks to the commercial court, the government will not only get the money back from those debtors but also send a massage to creditors that the bankruptcy procedures work as expected." (rid)