New central bank law to limit BI's financing facility
New central bank law to limit BI's financing facility
JAKARTA (JP): The proposed central bank law, expected to be
approved by the House of Representatives on Monday, will limit
Bank Indonesia's support of banks facing liquidity problems,
according to a central bank executive.
Achjar Iljas, a Bank Indonesia (BI) director, said on Thursday
that based on the new bill, BI's "lender of last resort" role
would be limited to providing a maximum 90 days of liquidity
facilities.
He said the liquidity facilities must be backed 100 percent by
high quality and liquid assets which means, during the current
economic crisis, only the central bank's Bank Indonesia
promissory note (SBI) is acceptable.
"So current facilities will no longer be available," he told
reporters on the sidelines of a debate session on the new central
bank bill between the government and the House of Representatives
commission VIII on finance and the state budget.
He explained that the limited lending function of the central
bank would guarantee that past weaknesses of BI would not be
perpetuated.
"This is a built-in system to prevent past mistakes from
reoccurring," he said.
BI's current financing facilities are divided into short-term
liquidity financing and long-term facilities, including
subsidized loans for certain economic sectors.
The central bank has been widely criticized because many of
its facilities have been taken advantage of by errant bankers who
were not made to provide sufficient quality collateral.
Analysts said the central bank might have difficulties in
upholding its revised lending role, as banks, especially in this
time of crisis, will continue to face liquidity problems and the
danger of being rushed by depositors.
They pointed out that the quality SBI assets of many banks
would not be enough to cover their loans from BI, which would be
necessary as the sector continues to suffer from a negative
interest spread due to higher interest paid on deposits than
earned on loans.
They also said that only certain state banks and banks with
capital adequacy ratios of more than 4 percent have relatively
higher SBI investments as deposits were difficult to channel into
an economy hit by such a serious recession.
"What happens if a bank runs out of SBIs while at the same
time its reserves fall into the red and needs liquidity support,
will it be defaulted? Or closed down?" questioned one analyst.
"I think BI must not be so rigid in implementing the new
ruling," he said.
The House of Representatives is expected to approve the new
central bank bill, which has undergone weeks of debating, on
Monday.
The law, which will replace a 1968 law often criticized as
ineffective, is designed to boost the independency of BI to allow
it to become the country's highest monetary body, free of
government intervention to design monetary policy and supervise
the flow of payments.
Under the proposed law, BI's banking supervisory role would be
transferred to a new independent body by the middle of 2000. This
part of the proposal has been under intense debate between the
government and the House, which wanted to retain the role with
the central bank.
BI's role of providing subsidized loans would also be handed
over to a new institution. (rei)