Moral hazards in banking

If the differences of views between Finance Minister Bambang Subianto and the central bank's Governor Sjahril Sabirin regarding the extent of disclosures to be made in the upcoming bank cleanup are any indication, we can expect a package of measures dead on arrival due to a complete lack of credibility.

Bambang redressed some of the damage done to the credibility of the monetary authorities by the two-week delay of the sweeping bank restructuring program in revealing early last week the main elements of the bank-reform package now being fine-tuned. He tried to describe the complexity of the forthcoming announcement to justify the postponement and demonstrate a high degree of transparency and accountability within the decision-making process.

He said the announcement, rescheduled from Feb. 27 to March 13, would reveal, among other things, the names of blacklisted bankers (directors and owners), banks violating the legal lending limits (connected lendings), banks' liabilities to the central bank, the core elements of their business plans and other pertinent data which will entirely expose all the basic facts about these banks to the public and to the market.

However, Sjahril argued two days later that the government was still reviewing the benefits and disadvantages of such extensive revelations, especially with regard to the names of errant bankers, citing legal aspects as one of the factors being seriously considered.

It is hard to find any reason for the government not to make disclosures as full as possible in the forthcoming bank bailout program, when high standards of transparency and accountability would go a long way in building up the credibility of the measures.

Invoking the banking secrecy stipulation as an excuse to limit the March 13 announcement strictly to generalities will risk making the government a laughing stock and validating the public's suspicions that the bank reform program is all about politics. The banking secrecy provision in the Banking Law No.10/1998 covers only information related to depositors.

Denying the public the essential information on key indicators about banks will create moral hazards among both bankers and depositors and make market discipline ineffective since the government's blanket guarantee on deposits launched in January, 1998 does not impose any ceilings. Depositors, including middle and top income people, and creditors will not bother to assess the soundness of a bank and will instead look mostly at the level of interest rates offered. They rest assured that whatever happens to their banks their money will be reimbursed by the government.

Bankers too will find more leeway to indulge in unsound practices, robbing their banks. Unfettered by the discipline of public scrutiny, bankers are not afraid of making incompetent or self-serving decisions that undermine not only their banks but also, through the multiplicity of its transactions, the whole industry; systemic risks. After all, under the current capital standard requirement, owners' money accounts for only slightly more than 4 percent of a bank's total assets.

Lack of a tough disclosure process is especially damaging in Indonesia where financial accounting and reporting requirements are not as stringent as in many other countries. Worse still, the system of checks and balances is not effective because the regulatory bodies not only are severely short of credible enforcement powers. They are also highly vulnerable to political pressures.

The government should have realized by now that one of the reasons the nation is lagging so far behind its neighbors such as Malaysia, Thailand and the Philippines has been an absence of political leadership on banking reform and law enforcement and of credibility of the policy-making decisions.

Dying banks mean no new loans to fuel an economic recovery, and weak, politicized law enforcement means allowing bad bankers to plunder the taxpayers' money and encouraging chronic debtors to thumb their noses at creditors.

It is most imperative therefore that the long-awaited package of bank restructuring measures should be designed in such a way as to impose the most stringent market discipline on the recapitalized banks and also to impose strong law enforcement on bad bankers and recalcitrant debtors.