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.