Indonesia to overhaul bank rules to guard against 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 including biggest lenders PT Bank Central Asia and PT Bank Rakyat Indonesia are facing slower loan growth and a weakening economy at a time when the Federal Reserve is preparing to lift US interest rates, a move that 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 market volatility has a bright side for Indonesia in that it helps moves to shore up the country's banking system, Mr 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 Ichsan, formerly an economist at Standard Chartered 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 in an interview at his office near Jakarta's stock exchange, where a copy of "Stress Test", an account of dealing with the financial crisis by former US treasury secretary Timothy Geithner, lay on the table.

The plan to identify the nation's most important lenders is in step with an international effort led by the Basel Committee on Banking Supervision and the Financial Stability Board, which have designed a broad framework for banks deemed too big to fail at both global and domestic levels in the aftermath of the 2008 global financial crisis.

Some Indonesian banks have been hit by a weakening commodity industry, yet that is unlikely to create a system wide banking crisis, he said. The risk for Indonesia's lenders could escalate if economic growth slips further and the rupiah slump deteriorates, 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." Bank Collapse The deposit insurance agency has 60 trillion rupiah (S$5.8 billion) in assets, enough to cover two commercial bank collapses, according to the organization'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.

The financial safety net bill, which parliament started discussing last month after approval by President Joko Widodo, will set out the process for dealing with a financial crisis and detail the requirements for banks to get bailouts.

After the 2008 financial crisis, an investigation into a US$573 million government bailout of Bank Century led to a jail sentence for former Bank Indonesia deputy governor Budi Mulya. A court ruled last year that the central bank acted corruptly when it said that a Bank Century failure would pose a systemic risk and changed a short-term financing rule to allow it to get a bailout.

The country's parliament voted in 2010 for a criminal probe of then-vice president Boediono and then-Finance Minister Sri Mulyani Indrawati over the bailout. Neither were implicated in wrongdoing, with Mr Indrawati leaving the government for the World Bank.

Regulators have learned lessons including the need to list systemically important banks before any crisis hits, Mr Ichsan said. The list could be expanded to 20, he said. Financial regulators are also pushing to consolidate the country's 118 lenders.

BLOOMBERG