New regulations issued to shore up financial sector

Aditya Suharmoko ,  The Jakarta Post ,  Jakarta   |  Tue, 10/14/2008 10:19 AM  |  Headlines

Indonesia has joined the world-wide effort to prevent prolonged fallout from the global credit crisis, which has toppled U.S. and European banking giants, by expanding deposit guarantees and streamlining money flow to banks.

The government on Monday issued two regulations in lieu of law effective immediately on deposit insurance corporations (LPS) and the central bank.

Under the new LPS scheme, the government will guarantee up to Rp 2 billion (US$204,000) worth of deposits, up 20 folds from the current Rp 100 million, to strengthen investor and depositor confidence in banks.

"The increase will protect 97 percent of the country's depositors," Finance Minister Sri Mulyani said, adding that only 95 percent of depositors had been covered under the old scheme.

"We have seen a possible threat that could disrupt our banking system, that is why we are changing the law."

LPS guarantee deposits at commercial and rural banks; national, joint-venture and foreign-owned subsidiary banks; and conventional and sharia banks.

Under the new policy, Mulyani said, the government is authorized to alter the maximum percentage of guaranteed deposits in certain emergency situations, including during a money rush or in the event of hyperinflation.

The government is also authorized to expand the guarantee if the number of guaranteed deposits covers less than 90 percent of the total depositors.

"The government can also change the deposit guarantee limit if facing a crisis that could harm the financial sector," Mulyani said, adding that the government would then ease the guarantee once the economy "had reached a new equilibrium".

To avoid a mass bank withdrawal on the scale of the late 1997 Asian financial crisis, which toppled a number of banks, the government will strive to ensure depositor confidence in banks so that they continue to invest their savings.

A money rush would threaten the liquidity of banks, forcing them to turn to Bank Indonesia (BI) for last resort loans to stay afloat.

In a bid to help banks increase access to liquidity resources, the government has also allowed banks to use lending assets as collateral to become eligible for short-term loans from the central bank.

Initially, banks can only use the highly liquid government bonds or central bank certificates (SBI) as collateral to become eligible to get short-term funds. However, not every bank owns government bonds or SBIs.

BI governor Boediono said the central bank would elaborate later on what lending assets could be used as collateral under the BI regulation.

"The regulation will help strengthen our capacity in the event that we are in need of such authority. If they need to, banks can use the facility," he said.

The government is currently drafting a law on financial sector safety aimed at improving coordination among authorities to better deal with a financial crisis.

Mulyani said the government would need a few days to design the mechanism.

Financial Sector Stability Forum head Raden Pardede said the regulation would enable related authorities to quickly respond in the event of a crisis in Indonesia.

Raden told The Jakarta Post earlier the government would have crisis management protocols in place to prepare for a crisis under the planned regulation.

The crisis management protocols will regulate the insurance, banking and capital market financial subsectors, he said.

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