Liquidating insolvent banks
The new government regulation on the process and procedures for liquidating insolvent banks should not make the general public inordinately worried about the safety of their savings deposits. The new ruling, as stipulated in Government Regulation No.68/1996, is designed both to minimize the risks of having to close down a bank and, in case of a bank failure, to better protect the interests of depositors.
Commercial banks, because of their fiduciary responsibility, are different in many substantial aspects from other business entities. Banks therefore are governed by a special law (Banking Law No. 7/1992), while most other companies are subject to the Company Law. The impact of a failed bank is much more extensively devastating than the bankruptcy of, say, an industrial company. Because banks are involved in multiple transactions with individual and corporate clients. A bank failure also causes systemic risks, with a chain of impacts similar to that of the domino theory.
The regulation on bank liquidation should be seen in light of the special characteristics of the financial institution. The ruling, designed to implement Article 37 of the Banking Law of 1992, governs the responsibilities of the management, supervisors and owners of banks in case of failure and the rights of depositors, creditors and other rightful claimants to the assets of a liquidated bank.
The new ruling provides better protection to depositors, because they are now treated as preferred creditors. That means depositors will enjoy high priority in the distribution of assets, in the event of the dissolution of a bank. Depositors' rights of claim are preceded only by payments to employees, taxes, operating costs, and court and auction fees. The better protection should be good news, especially to small depositors, because Indonesia has yet to establish a deposit insurance scheme like those already well-developed in many other countries. According to the central bank, a deposit insurance scheme is being prepared in cooperation with several other related institutions. But such a scheme will not likely materialize in the near future, because most banks are still in the process of internal consolidation. Moreover, the quality of banks is so widely varying that it would be extremely difficult, complex and sometimes, even delicate to determine the premium rate for the would-be participating banks.
More encouraging, though, is that the regulation not only stipulates "fire extinguishing" measures, but also clear-cut provisions aimed at preventing bank failures. The ruling states the stages of safety measures that the central bank has to take before it recommends to the finance minister to revoke the banking licenses. They include merger, new management and new owners.
Experiences have shown that most bank failures were caused not by incompetent bankers, but by executives, credit officers or owners with a criminal mentality. The regulation conveys strong warnings and stipulates heavy punishment for delinquent bankers.
It states that bank directors, supervisors and shareholders who are found responsible for leading their bank into bankruptcy are liable up to 15 years imprisonment and fines of up to Rp 10 billion (US$4.2 million), in line with the provisions of the Banking Law of 1992. In addition to these penalties, they are also held fully responsible to settle the debts of the liquidated bank. That means their personal assets can also be confiscated whenever the assets of the liquidated bank are not sufficient to settle all its debts.
Given the strong preventive measures stipulated in the new regulation and the Banking Law of 1992, and in view of the much improved bank supervision mechanism installed by the central bank after the failure of Bank Summa in 1992, we foresee a very remote possibility of another bank liquidation within the foreseeable future.