Te Indonesian banking system has experienced structural developments
.Following the implementation o extensive bank reorms in October 1988, the bankingindustry grew rapidly in terms o the number o banks as well as total assets
. However, alack o eective supervision resulted in imprudent behaviour by the banking industry. InFebruary 1991, prudential banking principles were introduced, and banks were urged tomerge or consolidate. Furthermore, in the mid-1990s sel-regulatory measures, includingthe improvement o internal controls as well as inormation technology and systems wereintroduced to strengthen the banks’ soundness. Unortunately, the wide-scale bankingconsolidation and the improvement o bank control systems never took place prior to therecent crisis. Tis was due to a lack o commitment by the owners o banks to strengthentheir organisations and weak law enorcement rom Bank Indonesia (BI) as the supervisory authority. Under the old law o 1968, Bank Indonesia lacked independence and, to a largeextent, was unable to apply tough measures on well-politically connected banks
.During the pre-crisis period, besides having poor governance and control, the bankingindustry also suered rom undamental liquidity management weaknesses as indicatedby: (i) large volatile deposits in the composition o banks’ unds (ii) a high loan to depositratio and exposure to oreign exchange risk
. As the currency crisis spread in mid-1997, thisgenerated other risks. Firstly, there was an increase o liquidity risk due to a huge maturity mismatch o assets and liabilities
. Secondly, credit risk increased due to the inability o debtors to repay their oreign currency loans as the rupiah depreciated sharply.Indonesia’s banking crisis o 1997/98 was the most severe in East Asia and one o themost costly crises o the last quarter o the twentieth century. Te fscal costs o resolving theIndonesian banking crisis amounted to Rp654 trillion or 51 percent o its annual GDP
. Itwas the second highest in the world during the last quarter o the century aer Argentina’s55.1 percent o GDP during its 1980–1982 crisis. Te experience o the 1997/98 crisis in
PROBLEM BANK IDENTIFICATION, INTERVENTIONAND RESOLUTION IN INDONESIA
by Sukarela Batunanggar
and Bambang W. Budiawan
Executive Researcher at Financial System Stability Bureau, Bank Indonesia. E-mail address: firstname.lastname@example.org
Senior Researcher at Banking Research and Regulation Bureau, Bank Indonesia. Te views expressed in this paper are those o the authors and do notnecessarily reect the views o Bank Indonesia. E-mail address: email@example.comTe authors would like to thank Mr. Halim Alamsyah, Mrs. SWD Murniastuti, Dr. Wimboh Santoso, and Dr. I Gde Made Sadguna or great support,and Mr. S. Raihan Zamil or helpul comments and suggestions. All errors are those o the authors.
Under the Banking Act, 1992, banks are categorised into commercial banks and rural banks. However, the analysis in this paper only ocuses oncommercial banks. Beore the 1997/98 crisis, the Indonesian banking system evolved in fve stages: (i) the rehabilitation period (1967-1973) to restorethe economy rom high ination; (ii) the ceiling period (1974–1983) where the interest rate ceilings were applied; (iii) the growth period (1983–1988),ollowing the banking deregulation o June 1983, removed the interest rate ceilings; (iv) the acceleration period (1988–1991) ollowing the impact o extensive bank reorms in October 1988; and (v) the consolidation (1991–1997) in which prudential banking principles and sel-regulatory measureswere introduced including capital adequacy, bank ratings and internal controls. See Batunanggar (2002 and 2004) and Djiwandono (1997) or moredetailed discussions.
Within two years, Bank Indonesia granted licenses or 73 new commercial banks and 301 commercial bank branches.
See Cole and Slade, (1998).
Foreign exchange risk was reected in the increasing ratio o oreign currency liabilities to assets and the signifcance o oreign currency loans inbanks’ portolios.
As short-term oreign currencies borrowings were replaced by medium-term and long-term rupiah loans.
Tis compares with Tailand 32.8 percent, South Korea 26.5 percent, Japan 20 percent, Malaysia 16.4 percent, and Philippine: 0.5 percent (1998); 13.2percent (1983 – 1987), see Honohan and Klingebiel (2000).