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Bail-in, not bailout banks
Profitability and asset quality have been adversely affected by the COVID-19-induced economic downturn and probably even economic recession.
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An employee moves packs of bank notes to the cash pool at Bank Mandiri in Jakarta. (The Jakarta Post/Seto Wardhana )
I
t is only a matter of time before a number of small and mid-size banks not only face a severe liquidity crisis but the risk of insolvency, as the financial sector faces tremendous pressures. Profitability and asset quality have been adversely affected by the COVID-19-induced economic downturn and probably even economic recession.
Consumer sentiment and borrower repayment capacity have been weakened by lower incomes, thereby increasing credit costs and making banks more averse to lending.
The government itself has ordered banks and non-bank financial companies to help financial consumers facing hardships as result of COVID-19, with flexibility relating to their loan obligations, including options such as deferral of repayments (for example, mortgage payment holidays), extension of loan terms and/or waiving of fees and charges, together with clear information about the implications of such options for the loans overall.
In anticipation of a domino-style collapse of the financial sector as businesses and individuals default on loan payments, Regulation in Lieu of Law (Perppu) No. 1/2020, issued early this month, not only expands and strengthens the authority of Bank Indonesia (BI) to give short-term liquidity credits to banks encountering a liquidity crisis but also authorizes the Deposit Insurance Corporation (LPS), as the agency in charge of coping with problem banks, to borrow from the government if it is short of funds for bailing out banks or reimbursing depositors with savings accounts of up to Rp 2 billion (US$120,000).
But Finance Minister Sri Mulyani Indrawati’s decree on fiscal management to cope with the COVID-19 impact, issued last week to implement the Perppu, seemed to imply that the LPS would emphasize bailing out failed banks with taxpayer money, rather than requiring the shareholders to first use their own money to save their banks from financial distress or insolvency, a process called bail-in.
But Sri Mulyani, we think, as the then-finance minister and coordinator of the Financial System Stability Committee (KSSK) in 2008, similar to her Cabinet position now, has taken a great lesson from the tremendous political turbulence over the last, controversial bailout of Bank Century (now Bank Mutiara) in 2008. This controversy and political inquiry into the bank bailout eventually “forced” her to resign from the Cabinet in May 2010, after which she joined the World Bank as managing director.
In fact, in a separate decree elaborating on the technical directives for the LPS borrowing from the government, Sri Mulyani, who is also the coordinator of the current KSSK, steps up the oversight of LPS liquidity and capital adequacy. She has ordered the LPS to intensify communication and coordination with the Financial Services Authority (OJK), which is in charge of bank supervision. This decree stipulates comprehensive safeguard clauses to ensure the LPS is fully transparent and accountable in handling problematic banks.
Moreover, as any bailout or bail-in of banks should be based on recommendations from the KSSK, the members of which include the governor of BI and the chairs of the OJK and LPS, Sri Mulyani will insist on full transparency and accountability in the KSSK decision-making process.
