Let market screen banks

Last week's sweeping bank reform measures are not a guarantee that there will be no more bank failures. The economy is in such a dire state and the social and political situation is so inimical to the banking business that the reform move should be supported by an additional set of concerted efforts to minimize the costs of any new bank failures in the future and to ensure that the surviving banks are really the fittest.

Just look at how crippled is our banking industry. The seven state banks and almost all major domestic private banks, which together account for more than 85 percent of the country's total banking assets and operations, are already technically bankrupt with negative capital. They stay alive now only with the artificial respiration provided by the blanket government guarantee on bank deposits.

Unfortunately, the 73 private banks assessed as sound with capital adequacy ratios of 4 percent and more are very small, their operations limited mostly to Jakarta and their roles in the national banking industry rather negligible.

Without additional measures, there is a great risk that a big portion of the Rp 300 trillion (US$35 billion) to Rp 350 trillion in taxpayers' money (state funds) being spent to bail out the crippled banks might be wasted.

It is imperative therefore that people -- who are adequately resourceful to analyze banking conditions or are able to collect banking information from analysts -- exercise market judgment in choosing the banks they deal with, and not simply by looking at the level of deposit interest rates offered.

It is not that depositors would lose their money in case of a bank failure because the government's blanket guarantee of bank deposits remains effective. Rather, last week's announcement further confirmed the public's perception that the government is not able, or rather has no political will, to act wholly as an objective referee in the market economy.

It is most urgent now to put the reform package to the toughest market test so that the banks which eventually survive are really sound and prudent financial institutions, trusted domestically and internationally. This can be achieved only if middle and top income people exercise their market judgment and not simply look at the level of deposit interest rates offered by banks. Likewise, bank managements should support the market mechanism by disclosing as much as possible to the general public. They also should act prudently in selecting the banks with which they conclude interbank money transactions and not allow themselves to be lured by the big profits offered, through unusually high interest rates, by bad banks strapped for liquidity.

Had bank managers and people who can afford to make market judgments carefully selected the banks they dealt with, the costs to the taxpayers incurred by the bank failures would not have been so huge.

If the government is really serious about building up a pool of core banks, trusted domestically and internationally, it should help make market forces work effectively to assess the viability of each of the banks still allowed to operate. This would be possible if the government saw to it that all banks fulfilled all the disclosure requirements.

Simply insisting that all bank deposits are fully guaranteed, as the government has so far done in a bid to maintain the public's trust in banks, amounts to enhancing moral hazards in the industry.

Also essential to preventing large-scale bank failures and to minimize the costs of unavoidable bankruptcy is the establishment of an early warning system through the implementation of effective bank supervision either through off-site or on-site audits. Unannounced on-site audits of banks by a team of experts in foreign exchange, asset management, information technology and credit assessment are especially needed now when a bank's condition could deteriorate sharply within a short period of time due to the country's economic woes.

However, all these additional efforts will still be less effective, and justice for taxpayers would not be served fully, if bad bankers and bad debtors are not brought before the full force of the law.