Indonesia Finance Minister Backs Bank Century Bailout

Government officials fingered by the Supreme Audit Agency as being responsible for alleged irregularities in the bailout of ailing PT Bank Century maintained on Tuesday that without the Rp 6.7 trillion ($710 million) rescue, the bank’s collapse could have ruined the country’s financial system. In a report of its probe into the November 2008 bailout submitted to the House of Representatives on Monday, the audit agency, also known as the BPK, said that as much as 40 percent of the bailout was effectively illegal and the decision to disburse the money had been subjective and not based on measurable criteria. Finance Minister Sri Mulyani Indrawati, who led the committee that determined that Century needed help, said the bailout was “legal” and failure to act might have “burned” the nation’s finance sector. She said that without the rescue, the country’s banking industry could have faced the threat of a liquidity crisis in light of the global financial meltdown. Sri Mulyani also justified Bank Indonesia’s analysis that defined Century as a “failing bank that poses a systemic threat,” saying that BI data showed that 23 banks of a similar size or smaller and a number of regional banks were also suffering liquidity problems at the time of the rescue. BPK Chairman Hadi Purnomo said the move to label Century as a failing bank that posed a systemic threat to the country’s financial system was not based on solid criteria, but on quick “subjective” judgments. Sri Mulyani said that despite reservations about how former Century shareholder, and now convicted criminal, Robert Tantular ran the bank, Century still needed to be rescued. “Suppose we know a house owner who is a drunkard and a criminal who annoys everyone around him. When his house catches fire, we cannot just sit and enjoy his suffering. Because it’s in our interest to ensure the fire does not spread to other houses around his,” she argued. But the minister also vowed to support a planned inquiry by the House of Representatives into the controversial bailout. The government initially injected Rp 1 trillion to boost liquidity at Century after the Indonesia Deposit Insurance Corporation seized it on Nov. 21 last year, eight days after the lender failed to meet a Rp 5 billion obligation on time. The bank has since received Rp 6.7 trillion in funds, prompting lawmakers to demand an inquiry into the bailout, which was far more than what they had approved. “We fully support the House in conducting the inquiry, considering it will help to answer all questions, put the Bank Century case in the right place and make clear the results of investigative audits by the BPK as well as the accountability of the decisions that had been made,” Sri Mulyani said. Vice President Boediono, who was central bank governor at the time of the bailout, said that he still needed time to study the BPK report, which he received late on Monday evening. He promised to give “as complete an explanation as possible,” after having studied the report. “I have a feeling that we can explain well and show that what had been done in the time of crisis was really appropriate under the conditions.” The BPK also said BI gave the state inaccurate information about Century’s finances in the critical days last November when the decision was made to save it. Darmin Nasution, the central bank’s acting governor, denied the claim that BI had given out-of- date data to inform the bailout decision. “It is normal” for banking data to be processed for some time before it is given out, he said.

On the Record: Responses to BPK

BPK: The BPK [Supreme Audit Agency] assumed that Bank Indonesia made a revision of the capital adequacy ratio regulation to allow ailing Bank Century to access the central bank’s liquidity facility.

Darmin Nasution (Bank Indonesia acting governor): BI made the revision to reduce the effects of the global financial crisis on domestic banks.

BPK: Bank Indonesia did not give real, sufficient and up-to-date information on Bank Century to the Financial System Stability Committee [KSSK] on Nov. 20 [2008] — information that was used to decide whether the bank posed a systemic risk.

Darmin: Data provided to the KSSK was the latest available data at the time. It was data about the bank’s condition on Sept. 31 and the bank’s capital adequacy on Oct. 31. It takes time to gather information from 65 Bank Century branches.

BPK: Bank Indonesia and the KSSK did not have a measured criteria to say that Century posed a systemic risk.

Sri Mulyani: The KSSK made the decisions based on three main considerations: the decision was legal by law, it was made under the scope of our authority, it would have the most benefit [to the bank and the country] and [the decision] was accountable.

PK: The KSSK decision that declared Century a failed bank that posed a systemic risk violated the law because it did not mention the amount that should be paid by the Indonesia Deposit Insurance Corporation [LPS] to bail out the bank.

Sri Mulyani: Principally, there are no laws that explicitly state that the KSSK has to mention the bailout cost.

BPK: The capital injected into Century after Dec. 18, 2008, had no legal base since an emergency 2008 regulation on the Financial System Safety Net had not been approved by the House of Representatives.

Sri Mulyani: Under the LPS law, the LPS can inject as much funds are necessary into a supervised bank to ensure the bank’s capital adequacy and liquidity flow, without further approval from the KSSK.

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