Trial to unveil supervision failure

Trial to unveil supervision failure

The government's recent move to liquidate 16 insolvent banks
has raised concerns. Economist Kwik Kian Gie looks at the
consequences of the move in this article.

JAKARTA (JP): Bank liquidations are always followed by
prolonged problems. Depositors have to wait until after the sales
of the liquidated bank's assets before repayment. During this
time they are overwhelmed with the uncertainties over whether
they will eventually get their money back or not. Many of them
have to stop their businesses and go bankrupt.

Since the 16 insolvent banks were very unhealthy, most of
their customers' savings and deposits have certainly vanished.
So, if their money could be repaid through the sales of the
liquidated banks' assets, that would be good news.

Liquidation of banks usually comes with a high "domino effect"
risk. It also unfairly punishes unoffending depositors.

The government's decision is a correct one, but the
implementation and the timing of the liquidation are debatable.
The government actually had sufficient time but its decision came
too suddenly and unfairly.

The International Monetary Fund, which together with the World
Bank and the Asian Development Bank recommended the banks'
liquidation under its reform package for Indonesia,
unsurprisingly praised the government's decision. But are they
aware that many blameless Indonesians have suffered from it?
Depositors are seemingly being punished for their failure to
deposit their money at foreign banks.

In the future, it would be advisable for the government to
take a truly fair solution to correct the banking industry.

When the government said that the liquidation of the 16 banks
was final, did it mean that there would be no more bank
liquidations in the future?

This is surely not true. Hence, the statement should be
construed to mean "for the time being".

So, where should we deposit our money? There are numerous and
unprofessional small banks whose owners tend to exploit deposits
for their own businesses without heeding regulations on legal
lending limits. People know that several banks are still offering
high deposit rates, which indicates that they are unhealthy and
illiquid.

It has been frequently suggested that the government make a
once-and-for-all banking reform under which depositors would be
repaid with funds from the state budget or Bank Indonesia, while
taking legal action against those who caused the banks to
flounder.

True, the government will provide a bridging loan of some Rp
2.3 trillion (US$697 million) for the repayment of deposits of up
to Rp 20 million. But will it investigate and punish the parties
responsible for the banks' insolvency?

What about the repayment of deposits worth more than Rp 20
million?

Then, how do customers choose banks to deposit their money in?
The licensing mechanism should actually guarantee that the
monetary authorities would continue monitoring the health of
licensed banks. But the fact is that Bank Duta suddenly went
bankrupt some years ago, while Bank Summa and 16 other insolvent
banks were liquidated.

In developed countries there are laws prescribing banks on how
to prepare the details of financial reports. Experts in the press
industry, therefore, can help society analyze the operations of
banks.

Indonesia has no such rules and banks which have failed to
issue any financial reports for long periods of time are still
allowed to operate.

This indicates that the government's policies cannot protect
the interests of depositors. Depositors, therefore, would do
better to set up a consumer protection agency with a special
division to defend the interests of bank depositors. The agency
could hire experts to investigate the conditions of banks and
disseminate the results of the investigation to the public.

Meanwhile, the objection of Bambang Trihatmodjo, one of
President Soeharto's sons, to the liquidation of his Bank
Andromeda, and his subsequent lawsuit against the government are
good news to those who previously thought that Bambang was beyond
the reach of the law.

Like other commoners, he has indicated that he would have to
abide by any decision taken by the administrative court. The suit
will also test the independence of the judge, who will have to
try the case involving a son of the President on the one side and
cabinet members, who are assistants to the President, on the
other.

The trial is expected to disclose the details of all matters
related to the liquidation of Bank Andromeda.

In the trial, we will be able to determine to what extent the
monetary authorities carried out their supervisory roles, what
tricks were employed and why the banks are considered to have
violated the law.