Front Matter Page
Monetary and Exchange Affairs Department
Contents
Acknowledgement
List of Abbreviations
I. Introduction
II. Strategic Overview of the Banking Crisis
III. Banking Sector Developments: 1988–1999
A. Phase I—1988-August-1997: An Unbalanced Financial Sector Liberalization
The 1988 liberalization measures
The Bank Summa incident
Problems in the state-owned banks
Pre-crisis financial position of banks and corporations
B. Phase II: October-November 1997: Macroeconomic Disturbances and Contained Banking Difficulties
Sample of banks selected for review
Objective of the individual assessments
Results of the individual assessments
October 31, 1997, policy package
C. Phase III: December 1997: The Banking Situation Gets Out of Control
D. Phase IV: January-February 1998—Laying the Ground for the Stabilization of the Banking System
E. Phase V: March-May 1998—First Resolution Initiatives and New Shock
F. Phase VI—June-September 1998: Design of a Comprehensive Resolution Strategy
G. Phase VII—October 1998-December 1999: Slow and Uneven Implementation Leads to a Sharp Increase in Costs
Private banks
IBRA and the IBRA banks
State banks
IV. Selected Issues
A. Blanket Guarantee and Lender of Last Resort (LOLR)
The blanket guarantee
The provision of central bank liquidity
B. Private Bank Recapitalization Scheme
Preparation of the plan
Implementation of the plan
C. Reform of the State Banks
D. Prudential and Supervisory Reforms: Strengthening the Financial Sector through Improved Oversight
Introduction
The regulatory framework
Classification and loan loss provisioning requirements
Off-balance-sheet activities
Enhancing Bank Indonesia’s supervisory capacity
E. Indonesian Bank Restructuring Agency (IBRA)
Operations of IBRA in 1998
The next stage: legal powers and shareholder settlements
Operations of IBRA in 1999
Some IBRA issues
F. Corporate Restructuring
G. The Proposal for a Currency Board Arrangement
H. Establishing Monetary Control
Developing market-based monetary instruments
I. Interbank Market Segmentation and Liquidity Squeeze
Market segmentation and the flow of funds in late 1997
A key problem: lack of capacity to intermediate
J. The Structure of Interest Rates
Interest rate spreads
Early crisis phase: Explosion of intermediation spreads
Impact on lending
K. Government Domestic Bond Market
Developing a secondary market for government bonds
The rise in domestic government debt
Secondary market trading
Regulatory framework
L. Governance
Closure of the sixteen banks
Bank Indonesia
IBRA
Private bank recapitalization scheme
The state banks
Bank Bali
V. Final Observations
A. General
B. Handling the Crisis
C. Moral Hazard
D. Costs and Government Responsibility
E. Concluding Remarks
Bibliography
Text Tables
1. Indonesia: Emergency BI Funding: August 1997-September 1998
Figures
1. Indonesia: Daily Foreign Exchange Rates—January 1990-December 1999
2. Indonesia: Money Market Rates on One Day Loans Between Commercial Banks,
3. Deposit Rates by Bank Group
4. Credit Rates by Bank Group
5. Intermediation Spread by Bank Group
6. Selected Money Interest Rates and the Intermediation Spread
7. Money and Credits
8. Overview of the Evolution of the Banking System
Boxes
1. Ten Critical Points in Managing and Resolving a Systemic Bank Crisis
2. A Chronology of the Asian Crisis, March 1997–July 1999
3. Capital Markets Impediments to Bank Restructuring
4. New Bank Indonesia Money Market Instruments and Credit Facilities
Appendices
I. Steps in Bank Resolution
II. Banking Sector Assessment Framework
Appendix Tables
2. Indonesia: Summary of Bank Interventions
Acknowledgement
The views expressed in this study are those of the authors and not necessarily those of the International Monetary Fund (IMF).
The authors were intensively involved during the period of the study as members of the team of Monetary and Exchange Affairs Department (MAE) of the IMF working in Jakarta on banking sector, monetary, and related issues. The team operated under the guidance of the Directors of MAE, Manuel Guitián (until end-1998) and Stefan Ingves (from start-1999), and Deputy Directors Malcolm Knight and V. Sundararajan. Among the other members of MAE who worked in Jakarta in 1998-99 were: Michael Andrews, Elena Budreckaite, Tito Cordella, Luis Cortavarria, John Dalton, Peter Dattels, Patrick Downes, Mohammed El-Qorchi, Alain Ize, Hassanali Mehran, and Reza Vaez-Zadeh. Among the numerous outside experts working with the MAE team were: Bill Albrecht, Henner Asche, Greg Brunner, Michel Dabadie, Ross Delston, Gerald Dodgson, Dieter Domanski, Marianne Gizycki, Paul Hadrys, Bruno Juillet, Uwe Nebgen, Tom Nordman, Henry Schiffman, Steven Seelig, Gerardo Vargas, and Roberto Zahler. This study would not have been possible without their contributions.
The MAE team worked closely with a World Bank team comprising in particular Richard Roulier, Ruth Neyens, Mike Edwards, Florence Cazenave, and Priya Basu, and with an Asian Development Bank team comprising Anthony Kuek and Henrike Feig.
The team worked closely also with a succession of teams of the Asia and Pacific Department (APD) of the IMF, which were headed by Bijan Aghevli, Hubert Neiss, David Burton, and Anoop Singh.
Comments on this study were received from many of the above. The study also benefited from comments by Stanley Fischer, Matthew Fisher, Lorenzo Giorgianni, Mark Griffiths, David Hoelscher, R. Barry Johnston, Mats Josefsson. Reza Moghadam, Andrew Tweedie, and Peter Wickham.
The authors are grateful to Lidia Tokuda for secretarial assistance.
List of Abbreviations
AMC |
Asset management of credits (originally named AMU) |
AMI |
Asset management of investments |
AMU |
Asset Management Unit (later renamed AMC) |
BAPEPAM |
Capital Markets Regulator |
BAPINDO |
One of four component banks of Bank Mandiri |
BBD |
Bank Bumi Daya (component bank of Bank Mandiri) |
BCA |
Bank Central Asia |
BDN |
Bank Dagang Negara (component bank of Bank Mandiri) |
BDNI |
Bank Dagang Nasional Indonesia |
BEC |
Bank Evaluation Committee |
BI |
Bank Indonesia |
BII |
Bank Internasional Indonesia |
BI-SKRIP |
Bank Indonesia System for Clearing, Registry, and Information for Government Paper |
BNI |
Bank Negara Indonesia |
BPK |
Supreme Audit Agency |
BRI |
Bank Rakyat Indonesia |
BSD |
Banking Supervision Department of Bank Indonesia |
BTN |
Bank for housing lending |
BTO1 |
Banks taken over in 1998 |
BTO2 |
Banks taken over in 1999 |
BUN |
Bank Umum Nasional |
CDs |
Deposit certificates |
COR |
Cut-off rate |
EGP |
PT Era Giat Prima |
FSDP |
Financial Sector Development Project |
FSAC |
Financial Sector Action Committee |
FSVC |
Financial Sector Volunteer Corps |
IBRA |
Indonesian Bank Restructuring Agency |
INDRA |
Indonesian Debt Restructuring Agency |
IRC |
Independent Review Committee |
JIBOR |
Jakarta Interbank Offer Rate |
JITF |
Jakarta Initiative Task Force |
KSEI |
Private Sector Payments Agency |
LLL |
Legal Lending Limit |
LOI |
Letter of Intent |
LOLR |
Lender of Last Resort |
MOF |
Ministry of Finance |
MOU |
Memorandum of Understanding |
MSOE |
Ministry of State-Owned Enterprises |
NOP |
Net open position |
PWC |
PricewaterhouseCoopers |
RTGS |
Real-Time-Gross-Settlement System |
SBCSC |
State Bank Credit Supervision Committee |
SBIs |
Bank Indonesia certificates |
SBPUs |
Short-term promissory notes issued by the banks |
TBTF |
Too big to fail |