Move on bad banks
Move on bad banks
What had been rumored for the past few weeks turned into blunt
reality over the weekend when the government moved to freeze the
licenses of seven banks and put seven more under the management
of the Indonesian Bank Restructuring Agency (IBRA). Minister of
Finance Fuad Bawazier and IBRA chairman Iwan Prawiranata
announced the drastic measure as a vital part of the overall
strategy to strengthen the economy and establish much-needed
normality for the rupiah's exchange rate, which has weakened by
more than 70 percent against the U.S. dollar.
While the move should be welcomed as another concrete step on
the long way toward cleaning the financial system of bad banks,
it will not likely contribute much to improving public confidence
in the national banking industry. IBRA's utter lack of
explanation as to why the banks had failed and why huge sums of
taxpayer money had been spent on a failed bailout effort will
instead strengthen public concern over Bank Indonesia's perceived
incompetence and lack of political autonomy.
The government's Jan. 27 bank restructuring program made the
right step by establishing IBRA, an autonomous agency, which
immediately took over bank supervision and restructuring
responsibilities from Bank Indonesia, the central bank. But the
public remained in the dark about IBRA's structure and
management. Its chief, Bambang Subianto, was quietly replaced
after less than two months in his post and the manner in which
the agency's directors were later appointed completely ignored
the need to build institutional integrity and autonomy in the
public's eye.
This does not mean that IBRA's management is made up of
questionable personalities. Instead, the appointment of Rini
Soewandi, the highly respected finance director of PT Astra
International, to its management should lend credibility to the
agency. Our point is that the public's perception of IBRA's
competence and autonomy should have been taken more into account
by publicly communicating the agency's important activities and
organization, especially because the banking industry is highly
sensitive to information.
Saturday's announcement left behind puzzling questions as to
why the central bank had spent more than Rp 3 trillion (US$353
million) for a failed bailout of the seven suspended banks. The
central bank should have known which banks were insolvent,
thereby liable for immediate closure and liquidation, and which
ones were simply illiquid, thus eligible to liquidity credits to
restore them to sound operations. The seven banks now put under
IBRA management should have been assessed as still viable but
illiquid, otherwise they should have been suspended as well. Yet,
the public deserves an explanation as to why they had been
granted more than Rp 14 trillion in liquidity loans.
Both Bank Indonesia and IBRA should have realized that the
government's blanket guarantee for rupiah and foreign currency
claims by depositors and creditors on all national banks from
Jan. 27 poses the risk of causing moral hazards among bankers,
creditors and depositors. The guarantee should have instead
forced the central bank and IBRA to act firmly and quickly on
insolvent banks to prevent further losses of public funds.
Moreover, the risk of a panic by depositors in the case of any
bank closings has now been minimized because of the full
guarantee.
Acting only after the central bank has pumped taxpayer money
into the suspended banks by as much as 500 percent of the banks'
own capital is surely the most effective way of destroying market
discipline on bankers and encouraging more crooked bankers to
indulge in unsound banking practices.
IBRA's explanations that it had suspended the seven banks only
because they had used the central bank's liquidity in excess of
500 percent of their total equity and that it had placed the
other seven banks under its direct management because they had
used in excess of Rp 2 trillion (US$235 million) each also left
more questions unanswered as to the sins of the problem banks.
This explanation implies that the problems of the country's banks
have been caused only by inadequate liquidity, while Bank
Indonesia and analysts have often stated that many banks have
violated legal lending limits and many other prudential
regulations.
Both IBRA and the central bank, in trying to bolster public
confidence in the banking industry, seem to place too much
emphasis on the government guarantee. We do not hear much about
how bank owners and large creditors are required to bear a
substantial part of the losses of failed banks, which is vital
for maintaining market discipline. This is one of the three
pillars for maintaining sound banks, the other two being
effective official supervision and internal bank governance.