Local banks ready to engage in investment banking

Local banks ready to engage in investment banking

Rendi A. Witular, The Jakarta Post, Jakarta

Indonesian banks are ready to engage in investment banking
activities in order to help reinvigorate the country's capital
markets, as long as the government sets up adequate guidelines to
regulate the business, an industry player and analysts have said.

Bank Negara Indonesia (BNI) president Sigit Pramono told The
Jakarta Post on Tuesday that several local banks, which have
universal banking operations, would have a capability to engage
in investment banking activities because of their relatively
strong capital.

"Local universal banks, such as Bank Mandiri and BNI, are
ready to engage in the business. However, there are no sufficient
guidelines yet from the authorities to regulate the sector," said
Sigit.

He also said that currently banks were already equipped with
adequate expertise and tools for the investment banking business
from their securities house operation.

Bank Mandiri and BNI, respectively the country's largest and
second-largest banks in terms of assets, each have their own
securities units, BNI Securities and Mandiri Securities.

The government has prevented banks from directly engaging in
the capital market because of fears that they could not manage
the risks, which would threaten their capital.

Banks are currently banned from providing full financial
backup for their securities houses. According to central bank
regulations, banks may spare only 10 percent to 20 percent of
their capital for securities operations.

Several foreign investors suggested earlier that the banking
authority allow local banks to act as investment bankers in order
for the country to have top securities houses with strong
financial backup, and to cater for development of the capital
market industry.

The government prohibited banks from engaging directly in the
capital market in 1998, after many banks went under during the
regional financial crisis.

Before the crisis, many banks engaged in the capital market,
such as investing their third-party funds in the stock market or
underwriting a bond issue, which required them to set aside a
huge provision in case the bond did not sell well.

A lack of prudence has been identified as a key factor leading
to the financial crisis in the late 1990s.

Director of Danareksa Research Institute (DRI) Raden Pardede
said that the call to allow banks to form investment banking
operations was based on the fact that many banks were currently
enjoying a huge excess of liquidity.

The excess liquidity is estimated to range from Rp 25 trillion
($2.94 billion) to Rp 30 trillion daily.

DRI is a division managed by state-owned financial group PT
Danareksa, which also owns Danareksa Securities.

Banks have been reluctant to channel their money to the
corporate sector because that is still considered risky due to
slow progress in the restructuring of corporate debt.

Raden said that banks needed to engage in investment banking
activities to help them channel their excess liquidity amid
difficulties with the corporate sector.

"Our banks are ready, and it is inevitable for them to engage
in investment banking activities in the future, as demanded by
global investors," said Raden.

Therefore, the central bank and the Capital Market Supervisory
Agency (Bapepam) should cooperate to draft a regulation to allow
such business to develop here, and to establish a prudential risk
management system in order to mitigate the risks, he said.

However, banking analyst Pradjoto feared that allowing banks
to engage in investment banking would further discourage them
from lending to the corporate sector as making money in the
former was easier.