The core message of a statement issued by the Group of 20 (G20) finance ministers and central bank governors in London over the weekend, regarding banks, systemic risks and the stability of financial systems, was quite relevant to Indonesia, especially in view of the recent furor about the costs and processes involved in bailing out Bank Century.
The G20 called for much bigger and better bank capital buffers against shocks, apparently to follow up the findings of analysts that the regulatory requirements on capital standards are too lenient.
In Indonesia itself, the minimum capital adequacy ratio (against assets) is still set at 8 percent, lower than the international requirement of 12 percent. But the issue is not only about the amount but also the quality of the core capital because a number of banks were known to use hybrid securities, which are more like debt than equity, as capital buffers.
The G20 reaffirmed its commitment to strengthen the financial system to prevent the buildup of excessive risk and future crises and support sustainable growth. It also reiterated the importance of stronger regulation and oversight for systemically important firms, including pushing for rapid progress in developing tougher prudential requirements to reflect the higher costs of their failure. Systemically important firms are institutions that are so big or deeply interconnected with other financial actors that their failure could trigger cascading losses and even contagion across the financial system.
The G20 called for a requirement for systemic firms to develop firm-specific contingency plans and for the strengthening of legal frameworks for crisis intervention and winding down firms.
Bank Indonesia has been largely held to blame for the larger-than-estimated Bank Century bailout. The quality and integrity of the central bank’s examiners and bank supervisors have been criticized for what now is increasingly seen as a decision that was poorly thought through.
The G20 points on stronger regulation and oversight for systemically important banks are precisely the arguments raised by critics who questioned the legitimacy of the government-central bank decision on Nov.21 to classify Bank Century, a medium-size bank, as a financial institution whose failure posed a systemic risk to the Indonesian financial system on the whole.
The debates on this issue will likely continue until the Supreme Audit Agency completes its investigative audit of the Bank Century rescue package within the next two weeks.
Some analysts have also questioned the current system whereby the Finance Ministry and Bank Indonesia wait until a bank is in deep trouble before deciding whether it poses a systemic threat to the financial system’s stability and the broader economy. In this context, the government should consider the suggestion made recently by a number of analysts that regulators should not have to wait until the very last minute, when they are under enormous time pressures to make such momentous decisions.
By that point, analysts say, financial regulation has failed. The underlying problem can no longer be prevented. All that can be done is to stabilize the institution with an extraordinary infusion of taxpayer money. Even then there is no guarantee that the infusion will be sufficient.
Those analysts advise us that a much better approach would be to identify financial institutions with systemic significance in advance — that is, in normal times — and regulate and supervise them accordingly.
