T

he government is currently formulating a regulation that will enable the Deposit Insurance Corporation (LPS) to receive funds to support its liquidity, particularly in times of crisis.

'We are preparing for the worst. If the regulation is issued, we will have a legal basis to assist the liquidity of the LPS in emergency situations,' Finance Minister Agus Martowardojo said after a Financial System Stability Committee (KSSK) meeting in Jakarta on Monday night.

According to Agus, the government would utilize its treasury assets to assist the LPS in an emergency.

Agus added that the government planned to complete the regulation before the end of 2013. However, the finance minister did not give details on how much assistance would be extended to the LPS or the criteria that would be used to determine an emergency situation.

The LPS is an independent institution that guarantees depositors' funds should a bank collapse. Twice a year, banks are required to pay the LPS 0.1 percent of their average third-party funds ' comprising savings, time deposits and demand deposits.

As of now, the LPS only covers savings or deposits amounting to a maximum of Rp 2 billion (US$205,824) per Indonesian depositor. To guarantee depositors' funds, it requires banks to charge a maximum 5.5 percent interest rate for deposits in rupiah, 1 percent for deposits in foreign currencies and 8 percent for deposits in rural banks (BPR).

Speculation has arisen that the new regulation is being prepared due to several banks currently experiencing financial problems.

However, LPS chairman Mirza Adityaswara said the drafting of the regulation should not be viewed as if a certain bank might collapse or that the LPS was facing liquidity issues.

'The idea of a regulation has been around since the LPS was established in case of emergency,' Mirza told The Jakarta Post via a text message.

'Based on the LPS Law, the government can provide loans for the LPS during an emergency; this is why we need a formal regulation to serve as a legal basis for such loans,' he added.

Mirza added that the regulation was necessary as currently, LPS' liquidity only covered around 1 percent of banks' total depositor funds.

'LPS' liquid funds stand at Rp 30 trillion. Compare this figure with Rp 3,100 trillion of banks' deposit funds in the country. It is, therefore, crucial that the LPS have a financing instrument during a major crisis,' he said.

Standard Chartered economist Eric Sugandi said the regulation was nothing to worry about.

'The formulation of the regulation is only an anticipatory measure by the government, which should be appreciated. It does not signal that a bank may collapse or that a major crisis is expected,' Eric said.