Resolving worrisome questions around Bank Century's bailout

Vincent Lingga , The Jakarta Post , Jakarta Wed, 09/02/2009 1:11 PM Headlines

 

The Finance Ministry and Bank Indonesia, responsible for the bailout of Bank Century last November, steadfastly defended the urgency and legitimacy of the rescue, citing the financial uncertainty, severe liquidity problems at 23 other mid-size banks and weakening rupiah at the time.

They kept saying they had no choice, as though a gun had been pointed at their heads. Without the bailout, things would have been much worse in the banking industry and losses to the economy could have been more devastating.

The Indonesian financial system during the last quarter of last year indeed faced adversity from the impact of the global financial crisis since September, and letting the financially distressed Bank Century go down could have triggered a massive run on many other banks.

True, a panic was prevented within the banking industry. But the argument about the systemic risk is now heatedly debated, even though such debate now seems a no-brainer because it is impossible now to reconstruct the kind of vulnerable conditions our banking industry was mired in last November for counter analysis.

As details about the bailout were revealed to the public and the cost of the rescue turned out to be many times more than the preliminary assessment, we cannot help but cry out the fault. The move simply threw out two of the basic principles of a bailout program: transparency, and least cost to the taxpayer.

True, banks differ from other commercial firms. The failure of a bank results in particular hardship to depositors and can lead to broader problems in the economy through multiple transactions.

These are among the reasons the government has provided deposit insurance through the Deposit Insurance Agency (LPS). But this means that when a bank fails, as Bank Century did on Nov. 21, the government comes in to pick up the pieces.

However, past experience has taught us that when banks are at risk of failure, their managers and shareholders often engage in behavior that risks losing even more taxpayer money.
This, we think, was what may have happened at Bank Century between November and December 2008, when the bank lost Rp 5.6 trillion (US$560 million) in deposit withdrawals.

Bank Indonesia had injected a Rp 700 billion emergency liquidity loan into Bank Century around mid-November and put it under its intensive and then special surveillance, before deciding to throw in the towel and ask the government (the Finance Ministry) and the LPS to take over.

But the developments, which followed what was then hailed as a strategic decision to maintain stability within the financial sector, left behind several worrisome questions about the integrity and competence of the central bank's supervision and the auditors of the publicly listed Bank Century, and the enforcement of disclosure requirements by the stock market watchdog (Bapepam) upon publicly listed companies.

How could a bank with total assets of Rp 15.2 trillion ($1.2 billion), net nonperforming loans of only 2.71 percent - lower than the average 3.90 percent within the industry - and capital adequacy ratio of 14.76 percent - much higher than the minimum 8 percent - as of September 2008 flirted with bankruptcy just six weeks later?

How could the value of Bank Century's assets have fallen so steeply within such a short time so as to have eroded its capital standard far below the minimum 8 percent?

Why did the preliminary agreement signed by Bank Sinar Mas Multi Artha, a subsidiary of the big Sinar Mas conglomerate, on Nov. 16 to acquire 70 percent of Bank Century fail to restore confidence in the problem bank?

Was the Sinar Mas Group able to sneeze time bombs of toxic assets in Bank Century, which Bank Indonesia examiners failed to detect?

How could we have been kept in the dark about a publicly listed bank that is supposed to be subject to stringent disclosure requirements?

These questions, we think, are some of the worrisome puzzles the Supreme Audit Agency should answer through its investigative audit in order to resolve once and for all the problems surrounding the bailout of Bank Century.

A forensic audit would be able to find more evidence of banking fraud, either by shareholders, management or big depositors.

This could have been the main reason why the capital injection by the LPS to rescue the bank ultimately ballooned to Rp 6.76 trillion, almost three times the central bank's preliminary assessment. The new wave of bad publicity will certainly make it much more difficult for the LPS to restructure the bank.

But it is much better now to raise and resolve all the questions, so that when the LPS eventually divests Bank Century within the next three to five years, as required by the law, the potential buyer will not uncover a time bomb, as encountered by Standard Chartered during a due diligence of Bank Bali in 1999, in light of a planned acquisition.

Standard Chartered uncovered that Bank Bali had paid about $78 million in bribes to brokers to have its inter-bank claims settled by the then Indonesian Bank Restructuring Agency under the deposit insurance scheme.