The country’s deposit insurer said Wednesday it had inadequate funds to cover savings of major banks in times of crisis as the current regulatory framework did not allow it to collect additional funds from alternative sources.

Established in 2004, the Deposit Insurance Corporation (LPS) initially used a Rp 4 trillion (US$300 million) capital injection from the government to run its operation. It now collects premiums from banks to run day-to-day operations and to grow its bailout funds.

The LPS charges banks with a premium rate that stands at 0.2 percent of the bank’s total deposit. The premium is paid twice in a year — 0.1 percent is paid during the first half, while the remaining 0.1 percent is paid in the second half.

As of April, the LPS had Rp 79.3 trillion in bailout funds, up 8.68 percent compared to the same period last year. At the same time, the third party funds of the banking industry grew by 9.78 percent to Rp 4.92 quadrillion.

“Our current funds were only enough to handle banks in the BUKU 2 category [in times of crisis], not enough to handle the systemic banks,” LPS chairman Halim Alamsyah said Thursday during an International Association of Deposit Insurers (IADI) Asia Pacific meeting in Yogyakarta.

BUKU I is the lowest category and lists banks with core capital below Rp 1 trillion, followed by BUKU II with core capital between Rp 1 trillion and Rp 5 trillion.

The BUKU III category includes banks with core capital between Rp 5 trillion and Rp 30 trillion, and BUKU IV lists banks with core capital exceeding Rp 30 trillion.

In May, there were 56 BUKU 2 banks with total third-party funds of Rp 732.43 trillion.

The Financial Services Authority (OJK) has also listed 12 banks from the BUKU 3 and BUKU 4 categories as the so-called “systemic banks” that bring great risks to the financial sector. It, however, did not disclose the names of the banks under such criteria.

“Each of the 12 systemic banks have an average third party fund of Rp 120 trillion. Meanwhile, from [the LPS’] Rp 79.3 trillion bailout fund, only 85 percent was allocated [to handle crises] while the rest were for operational and precaution purposes,” Halim said.

“Thus, we only had around Rp 70 trillion to handle crises.”

The LPS currently covers savings or deposits worth no more than Rp 2 billion for each Indonesian depositor.

The insurer is targeting to increase its bailout funds so that it can simultaneously cover savings of a systemic bank, a non-systemic bank and five rural banks (BPR) after 2020.

Although the LPS has an option to issue bonds to banks if it is without adequate funds, Halim said such bonds could only be issued in emergency situations. The 2016 Financial System Crisis Prevention and Mitigation (PPKSK) Law prohibits the LPS from issuing bonds in “normal conditions.”

“However, if bonds were issued in emergency situations, they could be costlier as investors would ask for a higher coupon,” Halim said.

Previously, the industry only saved banks through bailouts. The new law provides new options, such as the “bridge bank” or “purchase-and-assumption” scheme.

IADI secretary general David Walker, meanwhile, said that many deposit insurers shared similar problems in terms of funds adequacy and in accessing emergency liquidity assistance in some countries.

Currently, Walker added, most deposit insurers still focus on medium-sized banks. In the case of LPS, out of 76 liquidated banks from 2004 to 2016, most were rural banks.

“For bigger banks, we need a bail-in scheme but it will take time for the bank to build the bail-in fund,” Walker said.

As the world’s economy grows rapidly, average income increases, affecting the total savings number.

IADI data show that the average coverage limit of its members increased to $89,987 per account in 2016, more than double $39,290 recorded in 2009.

Popular

New criminal code requires public oversight, minister says

The politics of cash display in nation running out of forests

Surviving via 'VCS': Indonesians turn to virtual sex work amid COVID-19