Front Matter
Author:
Mr. Arto Kovanen
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Mr. Olivier M Frecaut
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Ms. Barbara E Baldwin
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Mr. Charles Enoch
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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

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Indonesia: Anatomy of a Banking Crisis Two Years of Living Dangerously 1997–99
Author:
Mr. Arto Kovanen
,
Mr. Olivier M Frecaut
,
Ms. Barbara E Baldwin
, and
Mr. Charles Enoch