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Indonesia rules out bank bailouts in new crisis management laws

Friday, March 11, 2016 - 16:18

[JAKARTA] Indonesian policymakers on Friday eliminated state finances as a potential source of support for troubled banks in changes made to proposed financial crisis management laws.

The change is among a number of items proposing state intervention that were removed from an earlier draft on crisis management framework.

The government proposed the draft bill to parliament last year to strengthen Indonesia's crisis management protocols and protect policymakers from criminal prosecutions for decisions they make.

The initial draft raised the possible use of state budget as a final funding source to support financial markets in case of a crisis and taxpayer's money to indirectly bail out affected banks.

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These items were removed in the the new draft, which was approved by a parliamentary commission on financial affairs and government agencies on Friday and will be voted upon in a parliamentary plenary session on March 18.

"We don't want the state budget to be exposed to financial crisis problems. That's why there's no mention of the state budget as funding source in the draft," Finance Minister Bambang Brodjonegoro said after a meeting with the commission on Friday.

However, the draft left the door open for the president to approve or reject proposals in times of crisis. It did not say if the president would be allowed to use state funds to help failing banks.

The commission and the government also removed earlier articles mentioning state budget guarantee for both loans and borrowings by the Indonesia Deposit Insurance Corporation (LPS), which would act as the banking restructuring agency during a crisis. In normal times, LPS is an insurer of bank deposits of up to 2 billion rupiah (US$152,893.51).

The draft also struck out an earlier item that would allow the government to sell bonds directly to the central bank in times of crisis.

The bill calls for stricter rules for banks to ensure they have enough capital buffers to save themselves when they are under pressures.

The Financial Services Authority has instructed the country's biggest banks to set aside more capital this year in what it calls a "capital surcharge", while Bank Indonesia has set up a regulation for countercyclical capital buffers.

REUTERS

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