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Jakarta Post

Government gives LPS more power to prevent bank failure

  • Riska Rahman

    The Jakarta Post

Jakarta   /   Mon, July 13, 2020   /   08:15 am
Government gives LPS more power to prevent bank failure A teller counts rupiah bills at a Bank Mandiri office in Jakarta. The government has issued a regulation that gives the Indonesian Deposit Insurance Corporation (LPS) more room to manage its own liquidity and to prevent banks from failing. (JP/Nurhayati)

The government has issued a regulation that gives the Indonesian Deposit Insurance Corporation (LPS) more room to manage its own liquidity and to prevent banks from failing in an effort to help strengthen the country’s financial system stability.

Under Government Regulation (PP) No. 33/2020 on the LPS’ authority in imposing measures to deal with financial stability issued on July 7, the corporation can now place funds in banks during the economic recovery from the impacts of COVID-19, among other things. The placement aims to strengthen the LPS' liquidity and/or to anticipate or solve financial problems that can result in bank failure.

Previously, the LPS was only able to take a reactive approach, as it was tasked with rescuing insolvent banks by liquidating them by taking over shareholder duty, selling or transferring assets and reviewing and canceling unprofitable agreements to help solve their liquidity problems, as stipulated in Law No. 24/2004.

The new regulation allows the LPS to place a maximum 2.5 percent of its assets in one bank and a maximum 30 percent of its assets in all banks.

The LPS’ total assets reached Rp 120.58 trillion (US$8.35 trillion) at the end of 2019. It also had Rp 114.53 trillion in securities investment, with liabilities reaching Rp 751 billion and total equity of Rp 119.83 trillion.

Fund placement in both healthy and struggling banks will be temporary, as the regulation only allows the LPS to place the funds for a maximum one month, with up to five extensions.

“This is an extraordinary preventive move as a direct follow-up to Law No. 2/2020 to prevent further disruption in our financial system,”LPS commissioner board head Halim Alamsyah said during a virtual press conference on Friday.

The law has been implemented to prevent economic meltdown as it allows the government to widen the state budget deficit beyond the legal limit of 3 percent and Bank Indonesia (BI) to directly buy government bonds to help finance the budget, among other things.

The COVID-19 pandemic has threatened the stability of the financial system, as it causes supply-demand shock and weakens the financial industry and macroeconomy, according to the Financial System Stability Committee (KSSK) in its first quarter report issued in May.

The loan disbursement rate among banks grew just 3.04 percent year-on-year (yoy) in May, much slower than 5.73 percent in April, as the coronavirus battered the real sector.

The banking industry’s capital adequacy ratio (CAR), meanwhile, stood at 22.16 percent in May, up slightly from 22.13 percent a month before, Financial Services Authority (OJK) data show. It continued to book an 8.87 percent increase in third-party funds in May.

OJK data also show that banks have provided 6.35 million debtors with credit restructuring worth Rp 695.3 trillion as of June 22, as part of the authority’s move to provide relief for borrowers affected by the outbreak.

Previously, publicly listed Bank Bukopin had to limit customers’ withdrawals due to liquidity issues and shareholder commotion that prevented them from injecting more capital into the bank. The reports triggered panic among customers, as the OJK tried to calm them, and pushed Bukopin’s shareholders to finalize the capital injection plan.

Halim said should the struggling banks had failed to improve their liquidity after the fund placement, the bank would be handed over to the OJK before being dissolved.

Other than providing a lifeline for problematic banks, the new regulation also enables the LPS to place funds in healthy and liquid banks to manage or increase LPS liquidity.

The PP furthermore allows the LPS to seek other methods to raise funds in its effort to prevent banks from failing.

The methods include having government bond repurchase (repo) agreements with BI, sales of government bonds to the central bank, allowing the LPS to issue its own debt papers and seeking loans from domestic or foreign parties, so long as they have no conflict of interest with LPS’ duty or incite  a negative perception and reduce the public’s trust in the corporation.

These financing methods were previously unheard of in the 2004 LPS Law, as the law had only allowed the corporation to seek financing through government loans if it needed more liquidity.

The LPS is still able to seek loans from the government but it should be the last resort if the corporation fails to increase its liquidity through the aforementioned methods.

Senior economist Aviliani lauded the regulation, saying that it allowed the corporation to take a more proactive approach in protecting banks that had paid premiums to the LPS and would help prevent bank failure during the COVID-19 pandemic.

“Receiving a fund placement from the LPS can at least restore customers’ trust in the banks for a short while and prevent them from rushing to get their money out of the banks,” she told The Jakarta Post over the phone on Friday.

Center on Reform of Economics Indonesia economist Piter Abdullah also praised the government’s effort to allow the LPS to seek more funding, as he projected the corporation would need it to anticipate a rise in problems faced by banks amid the pandemic.