Restrictions on banks using bourse will stay: Soedradjad

By Benget Simbolon

NUSA DUA, Bali (JP): Bank Indonesia Governor Soedradjad Djiwandono yesterday rejected demands to ease restrictions on share trading by commercial banks.

"Be patient please. The time will come for us to allow banks to be involved more in the capital market," Soedradjad told a seminar on local investors' roles to increase capital market investment, organized by the Indonesian Association of Issuers (AEI).

The monetary authorities must be cautious in easing the rules because it may destabilize the financial system, he said.

"Given the high risks in investments on the capital market, we consider it important to limit banks' involvement in the capital market," he said in his address to the two-day seminar.

He was commenting on a participant's request that banks should be allowed to buy stocks, provide credits for share purchases on the capital market and take paper as collateral.

Banks are allowed to provide custodian services, extend credit to securities companies and use shares listed on stock markets as additional collateral.

The monetary authorities want to extend the existing system, he said: "There are still many things that we have to address before letting banks increase their investments in the capital market."

The banks must consolidate before they can branch into the capital market, he said.

Soedradjad told reporters the government would not be rushed into a hasty decision on the issue.

He admitted that some local banks may be ready to play the capital market: "But we have to view the issue from all aspects."

Soedradjad said bank loans were losing their share of the corporate funds market because more companies were turning to the capital market.

This condition has encouraged banks to set up their own securities companies, and pushed the government to let them invest more in the capital market.

Soedradjad said once a bank established a securities company, the public would relate its performance to its securities firm.

"Although the bank and its securities company are legally separate, the public will lose their confidence with the bank if its securities company is not doing well," he said.

Double gearing -- in which one fund is used in two different businesses -- may happen in a bank with a securities company, he said.

"The bank may be able to convince the monetary authority that the two funds in the bank and the securities company are in line with the government's requirements. But it could turn out contrary to what the bank is trying to impress," he said.

Soedradjad said there was an argument for easier rules to expose the market to more competition and therefore reduce transaction and capital costs.

"Banks, as a result, will become more efficient and reduce their investment risks," he said, adding that consumers would also benefit.

Others believe easier rules would expose the banks to excessive risk, which could destabilize the whole financial system. This camp argues the securities business is much riskier than banking.

Soedradjad said banks should be involved in the capital market in a way that exposes them to minimal risks.