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Editorial: The first to fall
Bankers and analysts commended the central bank, Bank Indonesia, for the speed with which it moved last Friday to put the financially distressed Bank Century under the control of state-owned Deposit Insurance Corporation (LPS), thereby preventing systemic risks to the whole banking industry
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Bankers and analysts commended the central bank, Bank Indonesia, for the speed with which it moved last Friday to put the financially distressed Bank Century under the control of state-owned Deposit Insurance Corporation (LPS), thereby preventing systemic risks to the whole banking industry.
Bank Indonesia Governor Boediono assured the public that Bank Century would resume full banking operations Monday (today) with new management and depositors and that other creditors should not worry about their money.
True, sometimes -- often based on nothing more than a rumor -- banks face runs, in which many people try to withdraw their money at the same time. And a bank that faces a run by depositors and does not have the cash to meet their demands may go bust even if the rumor was false. Bank runs can also be contagious as depositors at other banks start getting nervous too, setting off a chain reaction and fueling a vicious circle.
Here lies the importance of the central bank's role as the lender of last resort. Given the global financial turmoil and its probable impact on our financial service industry, the Financial Safety Net Law was enacted a few weeks ago to give Bank Indonesia a broader mandate to bail out financially distressed banks or illiquid, yet solvent, financial institutions.
Bank Indonesia exercised this broader mandate over the past week, injecting Rp 700 billion into Bank Century and putting it under intensive and then special surveillance. But the publicly listed bank remained mired in a liquidity crisis.
The process of the bank bailout, the first since the 1997-1998 financial and economic crisis, seemed so easy and orderly. Boediono hastily assured the public that the country's banking industry remained solid and strong, insisting the Bank Century debacle was an isolated case.
However, the rumors two weeks ago about Bank Century's severe liquidity problems, and its failure to settle Rp 5 billion worth of daily interbank transactions, until it was taken over by LPS last Friday left behind several worrisome questions about the quality of the central bank's supervision and governance of small banks and the enforcement of disclosure requirements for publicly listed companies.
How could a bank that, as of September, had total assets of Rp 15.2 trillion (US$1.2 billion), net nonperforming loans of only 2.71 percent -- lower than the industry average of 3.90 percent -- and capital adequacy ratio of 14.76 percent -- much higher than the minimum 8 percent -- be flirting with bankruptcy just six weeks later?
How could the value of Bank Century's assets have fallen so steeply within such a short time so as to take its capital standard far below the minimum 8 percent? Why did the preliminary agreement signed by Bank Sinar Mas Multi Artha, a subsidiary of the large Sinar Mas business group that on Nov. 16 acquired 70 percent of Bank Century, fail to restore confidence in the problem bank?
How could we have been kept in the dark about a bank that is publicly listed and subject to stringent disclosure requirements?
When Bank Century failed to settle Rp 5 billion in interbank claims on Nov. 13, it simply dismissed the default as a technical problem and the central bank seemed to endorse that statement.
If the environment surrounding the near collapse of Bank Century is any indication of the quality of the central bank's supervision of the banking industry and of the standard of the disclosure requirements enforced on publicly listed companies, we have reason to worry.
Bank Century could simply be the first in a string of spot fires among small banks the central bank may have to extinguish, as the wildfire of the global financial turmoil rages.
Lack of transparency regarding the real condition of our banks could spread more rumors and various other forms of speculation about the condition of our financial institutions. When rumors spread two weeks ago about Bank Century's severe liquidity problems, the same rumors classified several other small banks as being in similar financial distress.
Now that the government's takeover of Bank Century has validated the rumor, Bank Indonesia has to do a lot of explaining about the condition of those banks named by the rumor mill, or the public will draw its own conclusions.
It really is an uphill task for Bank Indonesia, which is in charge of supervising nearly 130 city-based banks and hundreds of secondary banks, against the backdrop of a wildly volatile global financial situation.
Insofar as the 10 largest banks -- which control more than 90 percent of the industry's total assets -- are concerned, we share Boediono's view that the general condition of our banking industry is sound and stable.
But we are worried that without more effective supervision, the other 120 mid-size and small banks and hundreds of secondary (rural) banks are vulnerable to becoming a ring of fire that Bank Indonesia has to fight, when there is so much else going on.
