The central bank-IBRA spat

The financial distress suffered last week by Bank Putera Multikarsa after a massive run on its deposits amid the state bank loan controversy hitting its parent company-- the Texmaco Group-- ignited embers of animosity between the central bank (Bank Indonesia) and the Indonesian Bank Restructuring Agency (IBRA).

IBRA officials were quick to question Bank Indonesia's decision last March to classify Bank Putera as a sound bank with a capital adequacy ratio of more than 4 percent. The officials queried how the bank's capital standard could have deteriorated so rapidly.

The central bank however, defended Bank Putera as structurally sound, blaming its liquidity crisis mainly on the deposit runs which were set off by the controversy over the Bank BNI mega loans to the Texmaco Group. It is worth noting that Texmaco's controlling shareholders also happen to be the majority owners of the bank.

We were flabbergasted to observe how the two most important institutions in our financial and monetary systems could not refrain from trading barbs in mass media about Bank Putera's condition. They should fully realize that the financial market and the banking industry are so highly sensitive to information that even wild rumors could break a bank.

Everywhere in the world, there is hardly a bank -- no matter how large it is -- that can weather a massive run on its deposits without emergency liquidity assistance from the government. That is why central banks in most countries also serve as the lender of last resort, providing short-time liquidity injections to solvent banks which are hit by massive runs on deposits due to a sudden loss of public trust because of rumors or incorrect news.

But Bank Putera was the first case where Bank Indonesia, by virtue of the new central bank law, could no longer act as the lender of last resort. When the bank was hit early this month by nationwide runs on deposits, it initially relied on the interbank call money. But rumors that the bank was about to be taken over by IBRA made its bank creditors jittery and unwilling to extend the maturity limit of their loans. When Bank Putera was suspended from clearing activities early last week and placed last Saturday under IBRA management, it had a negative balance of Rp 280 billion at Bank Indonesia and owed Rp 434 billion in interbank debts.

Bank Putera's liquidity crisis once again laid bare the difficulties faced by many banks because of the long delay in having their interbank claims settled by IBRA under the government guarantee scheme for bank deposits and claims. Bank Bali's former controlling shareholder Rudy Ramli has insistently claimed that his bank would not have been taken over by IBRA had its claims on closed banks been settled. Bank Putera made a similar claim last week, arguing that it would not have faced such financial distress if IBRA had paid its interbank claims amounting to more than Rp 500 billion on closed banks.

It is hard to understand why IBRA has not yet settled interbank claims estimated at Rp 10 trillion on closed and nationalized banks despite the high-profile scandal caused by the payment of Bank Bali's interbank claims in early June.

As the processing of the claims has been audited by an independent, foreign auditor, and the rules have been made more clear-cut regarding which interbank claims can qualify for reimbursement under the guarantee scheme, we do not see any other legitimate reason for IBRA to further delay the settlement of legitimate claims.

The Bank Putera fiasco has also made it imperative now for both the central bank, which is charged with supervising sound banks, and IBRA, which is assigned to manage and supervise ailing banks that were nationalized and recapitalized, to take on their respective responsibilities according to the division of authority already clearly defined by the government.

That IBRA now manages and supervises all major private and state banks, leaving only small banks under Bank Indonesia's supervision, should not be seen as an usurpation or curtailment of the central bank's authority. Nor should it imply that IBRA is a convenient dumping ground for ailing banks. That condition reflects the depth and magnitude of the banking crisis the country has faced since late last year. Bank Indonesia should instead step up its bank supervision to prevent more banks from having to be rushed to the IBRA "banking emergency hospital".