The central bank-IBRA spat

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".