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Good governance fundamental to stability of financial institutions
While Indonesia may have avoided any direct fallout from the bank failures in the United States and Europe earlier this year, local financial institutions face the same difficulties stemming from the lack of good governance that was at the root of those collapses.
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Former president directors of state insurance company PT Asabri Sonny Widjaja (left) and Adam Damiri (right) stand trial at the Jakarta Corruption Court on Aug. 16, 2021. The court sentenced each of them to 20 years of imprisonment in January 2022. (Antara/Akbar Nugroho Gumay)
T
he first half of the year was marked by the collapse of several high-profile banks overseas. What happened to Silicon Vally Bank (SVB), Signature Bank, First Republic Bank and even banking giant Credit Suisse led to much discussion about the crisis’ potential impacts on the economy.
While Indonesia may not feel the cross-border effects of the banks’ collapses on the economy or local banks, the country’s financial institutions, especially insurance companies, are experiencing the same difficulties.
The overlooked root cause of the banks’ downfall, among others, is the lack of good governance.
SVB provided loans to start-ups without proper care and exceeded the standard loan-to-cash ratio, while Signature Bank has been criticized for its large amount of uninsured deposits and its involvement in crypto and other tech-focused lending.
First Republic's problems related more to its loan portfolio, where its model of providing low-interest mortgages to wealthy customers left it with enormous paper losses on its mortgage book when interest rates quickly rose. Customers began demanding higher deposit rates to keep their money at the bank, resulting in higher uninsured deposits.
Credit Suisse, meanwhile, has been mired in fraud, money laundering and misconduct for decades.
Last year's disaster at two state-backed Indonesian insurance companies, Jiwasraya and Asabri, had its roots in largely corrupt institutions and resulted in the loss of millions of dollars due to financial mismanagement. The two insurers were suspected of using customer funds to invest in pump-and-dump stocks, which are named after the practice of artificially inflating share prices through fraudulent practices before dumping them on other unsuspecting investors in quick sales.
