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Utrecht Summer School


Friday, July 18
th
, 2014

The Bank of Indonesia Bailout Action Towards Century
Bank in Indonesia

Financial Law and Economis
Putri Irma Ayudita & Rizky Abimanyu
Indonesia

Abstract

Bank bailout scandal rocks Indonesia, the long troubled Century Bank, once
the Indonesian's 13th largest bank, in the November 2008 was declared insolvent
by government and considered potentially triggered a systematic crisis in financial
sector. The down fall allegedly because the misuse of the customer funds which
organized by the owner himself. And once again, the Century Bank cases
successfully has drawn criticism from the public regarding the unreasonably
bailout funding, from Rp. 630 billion to Rp. 6.7 trillion.

According to Indonesian Finance Minister, Sri Mulyani Indrawati, the
decision to save Bank Century on November 21, 2008 is to avoid the occurrence of
banking crises in sequence on which potentially much more expensive and more
powerful from the first biggest national financial crisis in 1998. Sri Mulyani argued
by minimizing the cost and managed the bank with the good management, Century
Bank still has a potential to be sold at least in the good price. So, starting on the
last November 2008, Century Bank has been taking over by the Deposit Insurance
Agency (Lembaga Penjamin Simpanan - LPS), thereafter continue to operate as a
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full foreign exchange banks that serve the various needs of banking services to its
customers. The bank's takeover by the government agency is intended to further
improve the security and quality of service for customers. Also, government pointed
the new management team who consisting of professionals to manage and improve
the performance of the bank.

But the reality is not as easy as it seems. Although, the government has been
taken over by Deposit Insurance Agency (LPS), the bank which posted a profit of
Rp. 139 billion as of the first half of 2009, now highlighted by the public and House
of Representative (Dewan Perwakilan Rakyat - DPR). The main problem is the
unnecessary tremendous bailout funding which raised until Rp 6.762 trillion
without any "specific" reason.

Introduction

Century Bank as the merged bank of Pikko Bank, Danpac Bank, and CIC
Bank in 2004, has chronically declining performance until need a bailout from
the government. Based on the LPS statistic, in the mid of November 2008, the
injection of funds reached Rp 2.776 trillion
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, it is just to cover capital needs in
order to boost the capital adequacy for raising the basic ratio to 10%. Not after
awhile, on December 5, 2008, the government re-injected Rp 2.201 trillion. Thus,
in a span of 15 days total bailout injected at Rp 4.977 trillion. Not stopping there,
the bailouts continue pouring on February 3, 2009 at Rp 1.155 trillion, also
followed on July 21, 2009 of Rp 630 billion, and in the end the total bailouts
reached to Rp 6.726 trillion.


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Unravelling the Cikeas Octopus: Behind the Bank Century Scandal, George Junus Adicondro, p.126




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It revealed that after the mergers, there is no improvement of Century
Bank. Starting from 2005 to 5 November 2008, the bank entered intensive
supervision alternating Bank of Indonesia, as the central bank and also the
supervisor of financial institution. The cause is exposure to the securities of
unrated foreign exchange, worth until U.S. $ 203 million, as well as non-
productive assets worth Rp 477 billion, which suppresses the bank's capital. As a
follow-up of intensive supervision, Bank of Indonesia asks banks to sell
securities in cash by the end of December 2005. However, the bank filed a
settlement proposal through a guarantee scheme cash (asset management
agreement/AMA), and approved BI on February 21, 2006. Then BI also asked
banks to capital of Rp 500 billion. This request met the owner of the bank
amounted to U.S. $ 10.5 million and U.S. $ 14.85 million. Last bank rights issue
and reap Rp 442 billion
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.

But all was in vain, Century Bank is getting stuck and drag into special
surveillance on November 6, 2008. Based on the assessment of BI by September
30, 2008. The capital adequacy ratio or CAR dropped to 2.35%. This condition is
also increase by the decline of the public trust in the banks, especially large
depositors, such as Sampoerna and PT Timah, which draw their deposits
between July 2008, and continues to be more a massive withdrawals. In the span
of November to December 2008, total deposits were withdrawn at Rp 5.67
trillion.






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Pergerakan Mahasiswa Islam Indonesia (PMII) Cabang Depok, Studi Klub Sejarah Universitas
Indonesia, Compass Institute, Prosedur Penanganan Bank Bermasalah dan Peran Lembaga
Keuangan (BI, LPS dan KSSK): Belajar dari Kasus Bank Century Journal,
http://pmiiui.files.wordpress.com/2009/12/lpj_century.pdf

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Analysis

What is the reason behind the Bank of Indonesia bailouts action towards
Century Bank?

Bank of Indonesia (BI) has stated the reason behind its decision to gave
the Century bank predicate as insolvent and potentially systemic for the national
financial sector. Regarding the critical condition of Century Bank, The LPS must
spend up to Rp. 6.7 trillion to save the nation from the domino effect. Therefore,
there are 5 (five) criteria for the bank that could be categorised as the insolvent
and systematically important for financial sector
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, such as:

1. It will raise the impact on the real sector if the Century bank was closed. It will
cause the impact in real sector if government shut the Century Bank. In the first
parameter, Century Bank has 65 thousands costumer which still could
categorised in low impact but still will give an impact of the financial sector.

2. It will raises the impact to the other banks, in this parameter Bank of
Indonesia argued the impact will be spectacular because while in the critical
condition there are some small banks that have a big exposure in Century Bank.
In the other terms, the funds of that bank stuck in the Century Bank by Interbank
Money Market or (Pasar Uang Antar Bank - PUAB). Based on BI calculation, if the
funds in the banks are not able to return, the banks will have difficulty in
liquidity, the capital adequacy ratio (CAR) will down, and ended up drag into the
special supervision. Then it will cause the ripple effect to whole banking system.

3. The potentially impacts on financial markets in government bond market
sector and stock exchange. Century Bank would potentially drag the other banks

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Mardjono Reksodipuro, Kemajuan Pembangunan Ekonomi Dan Kejahatan, Kumpulan Karangan
Buku Kesatu, Jakarta, Pusat Pelayanan Keadilan Dan Pengabdian Hukum, 1994, p.102

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in trouble due to the fact that several banks have sizeable exposure in
government securities and it will shake the bond market due to massive sales.

4. The potentially impacts to the inter-bank payment system. The other banks
which have bills towards the Century bank could not payback the funds and the
debt is not guaranteed. This could make the chaos in the payment systems. And
also there would be psychological impact to the society.

5. Since in the mid-2008 while the Century Bank almost drag into under the
supervision, the global economic crisis began to escalate in the Indonesian. The
financial system suffered in great pressure. Banking funds in Bank Indonesia
Certificates (SBI), which is usually reached Rp 200 trillion suddenly decrease to
Rp 89 trillion. This means that there are indications of withdrawal of public
funds from banks.

In this condition, there are a big indication of public withdrawal and also
the decreasing of public funds deposits. As the result, to gain public attention,
bank increasing the interest rates and would ended up in interest rates war.
Moreover, the potential banks that had previously been supplying the funds and
facility in Interbank Money Market began to hold their funds and impact the
small banks in the medium to liquidity problems. When the interbank very tense,
the risk of credit default swaps in Indonesia jumped from the normal rate of 200
basis points to 1400 basis points. In addition, also the disbursement of foreign
investors around U.S. $ 6 billion. The great pressure on the Indonesia money
market
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.




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Centurygate: Refleksi Ekonomi-Politik Skandal Bank Century, Herdi Sahrasad, Freedom
Foundation, Yayasan Indonesia Baru dan Lingkar Studi Islam dan Kebudayaan (LSIK), 2009, p. 89

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Conclusion

The bailouts fund of Century Bank that swollen up to Rp. 6,7 trillion has
became the tense discussion and debate among the experts and public. People
asking about the government bureaucracy, but also the department as this
relates to two aspects of politics and law. The massive unreasonably bailouts
fund could giving the insecurity and reduce customer trust in the Indonesian
banking world.

Century Bank case reflects the weak supervision of Bank Indonesia (BI),
the central bank to commercial banks. The banks generally should receive strict
supervision of the Central Bank. The collapse of Century Bank has a negative
impact on the image of the banking and systemic impact on the Indonesian
economy if allowed to drag on. Therefore KSSK has taken steps to take over and
inject some funds to rejuvenate although ultimately lead to various problems.

From the standpoint of the law, the Century Bank case has detected a
violation of criminal acts by the owner and management by means of
embezzlement. By the expert opinions of these activities can be classified as a
crime corporation, which may be subject to criminal sanctions in accordance
applicable legislation as criminal offense of corporate responsibility.

Resolution and Suggestion

To solve the century bank case, Bank of Indonesia need to cooperate with
the government and the parliament to revealed the main problem in
funding from the start.

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The Government shall be liable to give the return of the Century bank
customer funds to maintain the public trust in Indonesia financial system.

There should be public transparency in resolving the Century bank case
with BPK ( The Audit Board of Republic of Indonesia ) and they should
carried out the audit of Century bank to the public to gain back the public
security and they must be assisted by the police, the prosecutor, and the
Bank of Indonesia itself.

BIBLIOGRAPHY

1. Unravelling the Cikeas Octopus: Behind the Bank Century Scandal,
George Junus Adicondro, p.126

2. Pergerakan Mahasiswa Islam Indonesia (PMII) Cabang Depok,
Studi Klub Sejarah Universitas Indonesia, Compass Institute,
Prosedur Penanganan Bank Bermasalah dan Peran Lembaga
Keuangan (BI, LPS dan KSSK): Belajar dari Kasus Bank Century
Journal,
http://pmiiui.files.wordpress.com/2009/12/lpj_century.pdf

3. Mardjono Reksodipuro, Kemajuan Pembangunan Ekonomi Dan
Kejahatan, Kumpulan Karangan Buku Kesatu, Jakarta, Pusat
Pelayanan Keadilan Dan Pengabdian Hukum, 1994, p.102

4. Centurygate: Refleksi Ekonomi-Politik Skandal Bank Century,
Herdi Sahrasad, Freedom Foundation, Yayasan Indonesia Baru dan
Lingkar Studi Islam dan Kebudayaan (LSIK), 2009, p. 89


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