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Indonesia to overhaul bank rules to guard against collapses

Customers use automated teller machines (ATMs) in Jakarta in this Feb 3, 2010 file photo. Indonesia is preparing a major overhaul of financial safety regulations to guard against the potential for bank collapses.

[JAKARTA] Indonesia is preparing a major overhaul of financial safety regulations to guard against the potential for bank collapses.

Regulators are working on a list of systemically important banks, likely to include the country's top 15 by assets, and parliament may pass a law this year setting out rules for bailouts, said Fauzi Ichsan, who heads the Indonesia Deposit Insurance Corp. The agency guarantees bank deposits and would take over any lenders in the event of a failure.

Indonesian banks are facing slower loans and a weakening economy at a time when the Federal Reserve is preparing to lift US interest rates, a move which has the potential to create more disruption in emerging markets. The rupiah has already fallen sharply, trading around 14,400 to the dollar, and is Asia's second-worst performing currency this year.

The disruption in emerging markets has a bright side for Indonesia in that it helps moves to shore up the country's banking system, Ichsan said in an interview in Jakarta on Tuesday.

"Many of us are happy there is market turbulence, it forces parliament to focus on it," said Mr Ichsan, formerly an economist at Standard Chartered Plc in Jakarta. "They tend to agree with us that we need a stronger legal foundation for future bankruptcy." The Indonesian banks on the systemically-important list could face higher deposit-insurance premiums and additional capital buffers, he said. The banking industry's capital adequacy ratio of 20 per cent and non-performing loan ratio of 2.6 per cent are both better than during the global credit crisis, and no lenders are currently being considered as failing, he said.

"This is not a crisis, it's turbulence," he said.

However, if economic growth slips further and the rupiah slump deteriorates, the risk for lenders could escalate, Mr  Ichsan said.

"If GDP growth falls below 4 per cent that would be alarming," as well as if the rupiah hits 16,000 against the dollar, he said. "It would eat up capital through loan provisions and write offs." The deposit insurance agency has 60 trillion rupiah (S$5.6 billion) in assets, enough to cover two commercial bank collapses according to the organisation's stress tests.

"More than two banks would be challenging," said Mr Ichsan, adding he would like to have double the current level of assets.