T

he current framework laid out by the financial system crisis prevention and mitigation bill (PPKSK), which leaves little room for the President to take action during any future financial crises, has raised concerns among analysts over how effectively crises can be managed should anything unprecedented occur.

The PPKSK bill '€” formerly known as the financial stability safety net (JPSK) bill '€” prevents any government intervention or financial assistance in the event of a financial crisis that may lead to the collapse of one or more systematically important domestic banks (DSIBs).

The final discussion between the government and lawmakers at the House of Representatives last week saw the latter remove all chapters and articles related to the use of state funds, which they said resembled the Bank Century bailout in 2009.

The bill, expected to be passed into law this week, now stipulates that owners of the DSIBs are to be primarily responsible for saving ailing banks by injecting fresh capital to improve their solvency, a scheme dubbed as '€œbail-in'€.

If the scheme fails, the Deposit Insurance Corporation (LPS) will be the institution tasked with stepping in, relying on its own financial resources to cover customers'€™ deposits and finance the lender takeover.

However, to DBS Bank economist Gundy Cahyadi, such an arrangement is not credible.

'€œWe don'€™t know when or from where a crisis occurs. If anything unprecedented happens, we will see a domino effect at a high speed,'€ the Singapore-based economist said over the phone on Monday, giving the bankruptcy of US lender Lehman Brothers in 2008 as an example.

At that time, Lehman Brothers was the fourth-largest investment bank in the US, yet the US government decided to let it fail. Many say that the collapse triggered economic turmoil in the US.

Gundy insisted that immediate government intervention was of utmost importance, but the bill provided no space for it to happen.

As reported before, Article 35 of the latest draft of the bill says that the president cannot take measures other than those recommended by the Financial System Stability Committee (KSSK).

Besides the LPS, the KSSK comprises three other institutions, namely the Finance Ministry, Bank Indonesia (BI) and Financial Services Authority (OJK).

According to the bill, the President may attempt to issue a regulation in lieu of a law (Perppu) to handle the crisis if available recommendations are insufficient, but the issuance of the Perppu will have to be coordinated with lawmakers at the House of Representatives, whereas the President is required to take a decision within 24 hours.

The Perppu may also be called into question as it has less legal authority than that of a law.

Samuel Asset Management economist Lana Soelistianingsih argued that the lack of government presence could create negative sentiment toward the domestic banking industry

'€œCustomers may be afraid of keeping their money in banks, knowing that the government will not be there for them if a crisis erupts,'€ she said.

Even if the customers opt to keep their money in banks, the scheme will potentially create wider gaps among banks, with the majority of customers choosing large banks over small ones.

Moody'€™s Analytics economist Faraz Syed said that the magnitude of economic shocks would determine the required response, but acknowledged that the LPS would not be able to handle everything by itself.

'€œIt'€™s probably unreasonable to expect all bank deposits to be guaranteed by a third party and whether the LPS would be sufficient to cover banks in a financial shock depends largely on how large and distressed a bank'€™s balance sheet becomes.'€

In such a scenario, he added, it would expect the central bank to boost liquidity measures to ease money market stress.