Lifting the bank's veil

Lifting the bank's veil

We were still recovering from the shock of the untimely
removal of four Bank Indonesia directors when news surfaced last
week that these four men had become the target of a police probe.
Although the police have not disclosed the grounds for their
investigation, most analysts believe that the four men were being
questioned about their authority and some of their decisions to
bail out ailing banks. Others suggest that the men may have
received generous payoffs for saving those banks.

Bank Indonesia has probably taken the most public beating
since the regional currency contagion struck Indonesia in June.
As the country's central bank, it is seen as the institution
charged with ensuring monetary stability and to protect the value
of the rupiah. With the rupiah plunging as rapidly as it has
these past few months -- its value to the dollar fell from Rp
2,400 in June to about Rp 5,000 last week after briefly touching
Rp 6,000 -- obviously public confidence has been eroded, in the
rupiah and in the bank's ability to manage the currency,

We have heard many theories of why the rupiah's value dropped
at such a rapid rate, but we have not heard any convincing
solutions. What is most striking is that very few of these
theories laid the blame directly on Bank Indonesia's doorstep.
Most people have been willing to give the central bank the
benefit of the doubt, believing that it had done everything in
its power.

If Bank Indonesia had saved numerous banks in the last few
years it was because it feared that if one bank was allowed to
collapse it could set off a massive rush on other banks and bring
the whole banking system down. Bank Indonesia has been fulfilling
its role as the bankers' bank, the mother of all banks. But when
bailing out banks became too costly, Bank Indonesia took the risk
of closing 16 of them in November and succeeded in preventing the
domino effect from setting in.

Therefore, when President Soeharto replaced four directors
last week, questions were being asked by the public about the
reasons behind the decision. In the absence of any official
explanation, many believed that the four men were being singled
out for the rupiah's free fall.

These questions remained unanswered when news broke that the
four had been summoned by the police to answer questions about
their past activities at Bank Indonesia. There was speculation
that the investigation was motivated by personal vengeance by
powerful business people who disliked some of their decisions.

The purpose and direction of the police investigation remain
unclear. But, if they were being questioned about their decisions
to save ailing banks, then, should it not be a collective
responsibility of the entire board of directors? On the other
hand, if they were being accused of accepting payoffs, then the
investigation could not have come at a worse time.

Public confidence in Bank Indonesia is already at a low ebb.
God knows what a scandal like this would do to people's
confidence, not only in the central bank but, more importantly,
in the rupiah, which it is supposed to protect. The investigation
is bound to raise public curiosity about the inner workings of
the central bank. It is bound to lift the veil of secrecy behind
which Bank Indonesia has operated. If scandals are what the
police are after then, for the first time, the public will become
privy to the central bank's dirty laundry.

To date, the public has accepted the notion that the central
bank is an almost sacrosanct institution. They have used the
rupiah as the medium of exchange and deposited their savings in
banks in the knowledge that their value and safety were
guaranteed by Bank Indonesia.

There can be no more greater public trust placed upon an
institution, save probably the church or the mosque. One would
have assumed that those who work at Bank Indonesia have passed
some sort of a morality test, just like a priest would.

For better or for worse, the investigation has been initiated,
and public curiosity raised. There is no sense in backtracking,
although the timing is unfortunate and could have a negative
impact on the economy. Since it is already in the open, the
investigation must be as transparent as possible. At this stage,
the risk of drawing the curtains on the investigation is greater
than exposing the inner workings of Bank Indonesia.

This entire episode also provides an opportunity for Bank
Indonesia, which has come under close public scrutiny since the
monetary crisis began, to come clean. It is an opportunity to
make a fresh start in recouping the public trust and confidence
necessary to restore monetary stability.