The business community's demand that the government introduce a blanket guarantee for all third-party deposits at banks to prevent capital flight is, to a certain extent, understandable, in view of similar facilities given to depositors in Singapore, Hong Kong and Australia.
The Indonesian Chamber of Commerce and Industry (Kadin) argues that last month's 20-fold increase in the ceiling amount covered by the Deposit Insurance Agency to Rp 2 billion (US$186,000) per account -- though rather a bold move -- is no longer sufficient after the governments in the three neighboring countries took even more drastic measures by putting a blanket guarantee on bank deposits.
A generous insurance coverage is indeed needed at a time such as now when our banking industry is vulnerable to a fallout from the systemic banking crisis in the United States and Europe. Such a broad insurance scheme is key to reassuring savers and depositors that their money in Indonesian banks will remain safe, thereby preventing a panic or sudden, irrational bank runs.
The huge increase in the ceiling amount of deposits covered by the state-funded insurance scheme to Rp 2 billion extended the guarantee to cover 99.92 percent of the estimated 81 million depositors at banks with Rp 919.2 trillion in savings, leaving only about 0.08 percent of depositors outside the guarantee program.
However, based on data at the central bank as of last month, the 0.08 percent depositors accounted for nearly 39 percent or about Rp 600 trillion in third-party deposits at banks, making them highly vulnerable to capital flight even at the slightest sign of trouble within our banking industry.
The main argument against a blanket guarantee of deposits similar to the one we introduced at the height of the banking crisis in Jan. 1998 is that such a program can increase the risk of imprudent behavior by individual banks and big depositors and can prevent the market from screening out unhealthy banks. People tend to overlook the soundness of banks, looking mostly for high returns on their savings.
However, our experiences from the 1998 economic crisis also showed that a blanket guarantee is not effective if depositors lose confidence in the banking industry and in the local unit (currency).
During the height of the 1998 crisis, rich people converted their money into dollars and transferred them to banks overseas -- but not because of an inadequate deposit insurance scheme. They simply no longer believed in the banking system, the rupiah and the political system as well. They flew for safety -- not for quality.
There are indeed big risks of money flying out to our neighboring countries, given the different levels of protection provided to depositors.
However, comparing the extent of the deposit insurance coverage in Indonesia with those in our three neighboring countries is rather irrelevant, as it is not apple to apple.
First of all, the moral hazard risks in Indonesia are much greater because of the lower quality of bank supervision by Bank Indonesia which must oversee more than 125 city-based commercial banks and hundreds of other secondary banks in the rural areas that are all covered by the deposit insurance scheme.
Introducing a blanket deposit guarantee now would be a huge gamble at the expense of taxpayers who are still suffering from the brunt of the Rp 600 trillion bailout fund for the banking industry in 1997 and 1998.
What is urgently needed to minimize the moral hazards is vigorous enforcement of good governance practices for banks through a stronger regulatory and supervisory framework to deal with excessive risk-taking by banks.
The government has strengthened another pillar of our financial safety net -- the lender-of-last-resort function of the central bank -- by broadening the category of assets banks facing severe liquidity problems can pledge as collateral for emergency credits from the central bank.
The government also has enacted a regulation in lieu of a law on a financial safety net which provides it with a broad mandate to take drastic measures to strengthen the financial system.
The 2009 state budget law stipulates a special clause authorizing the government to take contingency fiscal measures in case of an emergency situation.
These measures and the legislation are designed to enable our monetary and fiscal authorities to cope with any fallout from the global financial crisis and economic recession.
If, with all these safeguards, the big depositors, estimated to be about 60,000, still intend to withdraw and invest their money overseas with much smaller returns -- only because of the absence of a blanket deposit scheme -- let them go.
