Exposure to derivative deals ‘not too big’: Central bank

Aditya Suharmoko ,  The Jakarta Post ,  Jakarta   |  Fri, 01/23/2009 12:51 PM  |  Business

Despite  worries that banks might  be burned by derivative deals, the central bank is sure that any threat would  not be systemic as it would only affect a small number of banks.

“The number of banks exposed to derivatives is not many, and the losses are not too big, unlike in Mexico, Brazil and [South] Korea,” Bank Indonesia (BI) senior deputy governor Miranda S. Goeltom said Thursday.

But Miranda gave no figures.

A derivative transaction is a financial contract that derives its value from an underlying asset, commodity or liability, and is normally used as a hedging or investment tool.

Included in this category are options, swaps or forward contracts.

Concerns over banks exposed to possible derivative losses emerged following a 29 percent drop in Bank Danamon’s net profits in 2008 from a year earlier as it had to set aside  major provisions to cover losses from derivatives transactions.

The bank, the nation’s fifth largest lender, said the derivative losses had a lot to do with the fact that many exporters, amid the falling commodity prices and weak export demand, had problems in fulfilling their obligations in respect of forward contracts. But, it expects no additional losses to emerge from these transactions in the future.

According to a Danareksa Securities analyst, without these derivative losses, the bank would have booked 10 percent growth in net profits from a year earlier.

However, Miranda suggested that this problem was not prevalent in the banking industry.

Halim Alamsyah, BI director of banking research and regulation, said the central bank was engaged in collecting data on the exposure of banks to derivative products.

“The data is being collected. It is not easy as there are many details that we need to know,” he said.

He added BI allowed banks to buy derivative products if they were for hedging.

BI issued in December a regulation forbidding banks to buy derivatives for speculative purposes as this could weaken the rupiah.

BI governor Boediono said the rupiah remained volatile.

“We will always be in the market. We manage (the rupiah) with sufficient liquidity,” he said.

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