The government plans to establish a list of major domestic systematically important banks by the end of this month. Banks on the Domestic Systematically Important Bank (DSIB) list will be rescued by the government when faced with risk of collapse, because of the negative impact that would have on the national economy.
A reported 9-12 of the current 120 national banks will be included on the list. Halim Alamsyah, Chair of the Board of Commissioners of the Deposit Insurance Company (LPS), said the government and Bank Indonesia are still drafting the list, and that no decision has been made as to whether the names of the banks will be announced publicly.
The establishment of the DSIB list follows the passing of the Law on Financial System Crisis Handling and Prevention in March. Members of the House of Representatives had asked the Financial Services Authority (OJK) to announce the names of the banks on the list, along with their capital adequacy ratios (CAR) and liquidity ratios, within three months.
This law is deemed crucial at a time when the global economy has yet to fully recover from the 2008 global financial crisis. New uncertainties have arisen since the world was shocked by the UK’s decision to leave the European Union (Brexit).
Before the passing of this law, there had been a legislative vacuum for handling of economic crises in Indonesia. This was because the Law on the Financial System Safety Net, which was used as the basis to rescue Bank Century and protect Indonesia from an economic storm in November 2008, had been revoked.
With the new law, the protocol for handing crises will be based on this regulation alone. The OJK will draft categories of bank based on business scale and capital, which will be evaluated every six months.
For domestic systematically important banks, the criteria are more challenging, including the capital adequacy ratio requirement. There is a possibility that these banks will need to increase their capital between 1 and 2.5 percent, depending on which of the four bank categories drafted by the OJK applies.
Halim was confident there would be no mass movement of customer funds to banks on the list from other banks. “DSIB banks could become less competitive due to the tougher requirements. They will not be able to offer very high interest rates,” he said.
The new law gives the LPS more duties and authority. Under Law No. 24/2004 on the LPS, the agency’s duties are limited to performing a curative function and guaranteeing customer savings. But the new law also requires the agency to take preventative measures with regard to bank solvability, and to lead the restructuring of potential DSIB banks. According to Halim, the LPS organisation will be strengthened to enable its participation in monitoring the health of banks.
The new law also puts a stop to state bailouts of ailing banks. LPS assets, which currently amount to some IDR 66 trillion, will be allotted to help deal with bank liquidity issues. These funds, previously only disbursed in a time of crisis, can now be disbursed for crisis prevention needs.
To help increase LPS fund, the regular premiums of participating banks may be raised, or fluctuating premiums applied, depending on the results of the bank health assessment.