Commentary: Bank consolidation should be top priority for central bank
Except for the plan to introduce multiple licenses for banks, we do not see how the forthcoming package of bank regulations, especially those relating to bank ownership cap, will fit into the banking architecture that Bank Indonesia launched in 2004.
The national banking architecture was designed to create a new bank landscape consisting of two to three banks of international class, three to five national anchor banks and 30 to 50 smaller banks with specialized services and thousands of rural or community banks by 2014.
The central bank has been trying persuasively since 2004 to speed bank consolidation in a bid to create fewer but stronger-capitalized banks because it is extremely difficult to effectively supervise so many banks.
But the number of full-service, city-based commercial banks remains quite high (about 120 now), yet most of them have a very low capital base.
But we greatly welcome the central bank’s plan to change the current system of a single license for a whole range of banking operations to a multiple-license system that will require banks to meet preset capital standards for obtaining a license for a particular kind of operations.
This multiple-licensing system should have been implemented immediately after the launch of the 2004 banking architecture to accelerate bank consolidation.
But instead of setting bank consolidation as the top priority for its regulatory framework, the central bank has been pronouncing, in bits and pieces, since April that it would soon restrict bank ownership by nationality and by category — finance and non-finance institutions and individuals.
We wonder why Bank Indonesia suddenly thinks it is now so urgent and imperative to shake up the ownership structure, while the biggest challenge facing the banking industry amid the increasingly globalized financial market should be good corporate governance and bigger capital base.
We do not have enough empirical evidence to prove that there are positive correlations between ownership cap by nationality, prudential bank management and good corporate governance, as long as the majority of owners are bank or non-bank financial institutions.
Look at how during the 1998–1999 banking crisis almost all the biggest local banks in the country had to be bailed out by the government, while only a few foreign-owned banks were plunged into severe financial distress.
Bank Indonesia may think, since the capital adequacy ratio (CAR) of all local banks is quite high now (over 16 percent), it is high time to tinker with ownership structures to curb the growth of foreign-owned banks.
But in the increasingly globalized financial market, the high CAR of our banks has little meaning because it is founded on very low capital base.
Indonesia is the largest economy in Southeast Asia, but its largest bank, Bank Mandiri, is still relatively unknown in the region and ranks only the sixth largest in the region in terms of assets.
The title of the largest bank is held by Singapore’s DBS financial service group, whose announcement of its plan to acquire Bank Danamon seemed to have prompted Bank Indonesia to hastily rewrite bank ownership rules.
Instead of restricting bank ownership by nationality and by the category of owners, the new set of regulations should focus on rules to ensure the highest standards of good governance and concerted efforts to accelerate bank consolidation.
Restricting bank ownership, even with a transition period of 10 to 20 years as some Bank Indonesia executives have hinted, could rock the banking industry because our financial market is not deep enough or big enough to absorb such massive divestment that has to be made by bank shareholders.
Ownership cap regulations would also give the wrong signal to investors, and such a negative perception is the last thing we need now in coping with the uncertainty of the international financial market due to the eurozone crisis.
Forcing banks to replenish their capital base should be the top agenda for Bank Indonesia because bigger capital is needed to absorb risks or shocks.
Politicians and analysts who demand severe restrictions on foreign banks should realize that our banking industry would not have recovered so quickly had it not been for the capital injection, the transfer of skill and expertise from foreign banks and foreign investors.
Even now the banking industry can still benefit greatly from the presence of strong, foreign banks with good reputation.
More importantly, though, is for the central bank to be able to direct foreign banks to support the top priority programs of our economic development through lending and other financial services, promote the best practices of good governance to local banks and companies and provide our economy with access to international finance.