The House of Representatives (DPR) finally passed into law on Thursday the long-awaited financial crisis bill, despite several experts criticizing the fact that it strictly shuts the door for any bailout scheme during a crisis.
The new law — officially, the Financial System Crisis Prevention and Mitigation (PPKSK) Law — is designed to give policymakers legal basis for their actions in times of financial crisis.
The law is crucial, especially as the International Monetary Fund (IMF) and other organizations have predicted continued uncertainty in the global economy.
In its latest report, the IMF called the financial crisis bill a top priority for strengthening the institutional framework supporting financial sector stability.
Finance Minister Bambang Brodjonegoro is satisfied that after eight years the country finally has a financial crisis law.
"This is the optimal result for the government and lawmakers, taking into consideration all aspects, te chnical and political," Bambang said, referring to the key areas of debate during the bill's deliberation.
But the law leaves little room for the president to take action during any future financial crises.
The government proposed financial intervention in the event of a crisis, but the House opposed this idea, saying the use of state funds resembled the Bank Century bailout in 2009 that turned out to be scandalous.
In the past, it was only a government regulation in lieu of law (Perppu) that contained measures on crisis prevention and management.
The Perppu was issued in October 2008, at a time when the global economy was suffering from a financial crisis and it became the foundation for the controversial Bank Century bailout. The Perppu was revoked last year, paving the way for fresh deliberations of the crisis bill.
According to the new law, only the president has the authority to declare that the country is in financial crisis. The president can issue the Perppu to handle the crisis of his or her own accord if he or she deems the recommended actions from the Financial System Stability Committee (KSSK) are insufficient.
The issuance of the Perppu will have to be coordinated with the House of Representatives, even though the president is required to take a decision within 24 hours. The Perppu may also be called into question as it has less legal authority than a law.
The financial crisis law contains measures and procedures that must be followed by the KSSK, which consists of the Finance Ministry, Bank Indonesia (BI), the Financial Services Authority (OJK) and the Deposit Insurance Corporation (LPS).
Unlike the Perppu that allowed the use of state funds to save a failing bank, the new law shuts all doors to such a measure and instead puts the highest emphasis on a bail-in scheme.
The scheme demands that owners of a domestic systematically important bank (DSIB) — or a "too-big-to-fail bank" — b e responsible for its finances, prepare a detailed action plan and inject capital whenever necessary.
Bambang even said the government would pursue banks' owners "till the last drop of blood", demanding they take responsibility should their bank run into trouble.
If the scheme fails, the LPS will be the institution tasked with stepping in, relying on its own limited financial resources to cover customers' deposits and finance the lender takeover.
Consequently, this scheme also puts much greater pressure on the OJK to do its best to supervise banks.
OJK commissioner for banking supervision Nelson Tampubolon said his office would soon issue additional regulations to follow up on the new law and also come up with a list of important banks before June.
"We have issued a regulation that describes the criteria for identifying a [DSIB]," he said.
The criteria involve size, inter-connectedness with the financial system and business complexity.
The country's four biggest banks, with core capital exceeding Rp 30 trillion (US$2.28 billion) each, will certainly make the list. They are state lenders Bank Mandiri, Bank Rakyat Indonesia (BRI), Bank Negara Indonesia (BNI) and private lender Bank Central Asia (BCA).
Foreign branches, whose parent companies have been declared global systematically important banks, will be included on the list as well.
Meanwhile, several experts have aired criticism of the crisis law, arguing that the lack of government assistance in times of crisis may be detrimental and may trigger negative sentiment toward the banking industry.
BCA chief economist David Sumual said the bail-in scheme would still involve state funds because state banks and regional development banks controlled sizeable amounts of depositors' funds.
"These banks will need capital injection from their owners when facing solvency issues. Given the fact that they are largely controlled by the gover nment, the capital injection will come from the state's coffers."
Highlights of the Financial Crisis Law
* Article 6: The KSSK is authorized to make recommendations to the President regarding changing [the country's] financial status from normal to crisis or from crisis to normal.
* Article 11: The KSSK's decision-making mechanism is deliberation with consensus. If no consensus is achieved, a decision can be made through a vote [the LPS does not have voting rights].
* Article 15: The KSSK will report on financial system stability every three months.
* Article 17: The OJK will coordinate with BI to update the list of DSIBs once every six months.
* Article 18: Each DSIB is obliged to meet requirements regarding capital and liquidity and submit an action plan to the OJK.
* Article 22: The LPS will mitigate solvency issues at a DSIB by partially or wholly transferring its assets and liabilities to a recipient bank or to a bridge bank or by taking over the DSIB in accordance with the LPS Law.
* Article 28: The difference between proceeds from the sale of a bridge bank and costs borne by the LPS is not considered a state loss.
* Article 32: The President must make a decision within 24 hours after receiving a recommendation from the KSSK to change the financial status to crisis.
* Article 34: When deciding if the country is in a crisis, the President can partially or wholly accept recommendations from the KSSK.________________________________
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Source: Strength of crisis law questioned
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