Indonesia Bailout Fund Too Small for Bank Restructuring Mandate

  • Talks underway about adding new premium to fees paid by banks
  • Sale of agency’s bond holdings would also create risks

Indonesia’s bank deposit insurance agency is discussing ways to bolster its 75 trillion rupiah ($5.6 billion) war chest which a top official says is insufficient for its new mandate of restructuring banks on top of bailing out depositors.

Talks are underway about adding a new premium to the existing fees Indonesian banks pay to the agency, known as LPS, based on their insured deposits, LPS commissioner Destry Damayanti said in an interview last week. The government plans to release details of the new fee structure later this month.

"Our mandate is a heavy one, as LPS is also responsible for bank restructuring in the event of a crisis," Damayanti said. "That’s why we’re discussing internally on applying an additional premium."

LPS gained a broader remit from a financial system stability law passed last year. That included the ability to restructure troubled banks by transferring their good assets to other institutions and focusing on resolving the bad assets. It can also issue bonds to the central bank to raise funds in the event of a crisis.

Indonesia’s banks were hit hard in the the aftermath of the Asian financial crisis which erupted in 1997. More than 40 insolvent banks -- mostly rural lenders -- have been closed since 2006, and 20 more banks are in the process of being shuttered, LPS data shows.

Controversial Rescue

One of the most controversial rescues was the 6.7 trillion rupiah bailout of PT Bank Century in 2008, intended to prevent the collapse of 23 other banks. Former Bank Indonesia deputy governor Budi Mulya was sentenced to 10 years in jail after a probe of a 1 billion rupiah loan he obtained from the owner of Bank Century.

LPS’s current resources are invested wholly in government bonds, which creates another risk in the event bailout funds are needed in a crisis, Damayanti said. “If we were to sell our entire government bond holdings in the market, that would create instability.”

Damayanti said it’s still not decided whether the banks will pay a flat rate for the new bank restructuring premium, or a different rate based on their riskiness. “The size and when it should be paid are still being discussed by the team,” she said, adding that the new amounts wouldn’t impose a burden on the lenders.

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