Prepared by R. Armando Morales (APD). Special thanks to Steven Seelig, who provided guidance and background information, and to Edo Mahendra and Wiwit Widyastuti (IMF Jakarta Office) for their valuable research assistance.
Enoch, Charles; B. Baldwin; O. Frecaut; and A. Kovanen. Indonesia: Anatomy of a Banking Crisis: Two Years of Living Dangerously; IMF Working Paper No. 01/52, Washington D.C., 2001.
Batunanggar, Sukarela; Financial Safety Nets: Review of Literature and its Practice in Indonesia, in Financial Stability Review II-2006, Bank Indonesia, Jakarta, 2006.
Some delays also occurred because of overall institutional deficiencies rather than IBRA-specific problems.
The government’s plan to introduce a financial safety net was incorporated into the 2000 EFF program with the Fund.
See Garcia, Gillian G. H.; Deposit Insurance: Actual and Good Practices, IMF Occasional Paper No. 197, Washington, DC, 2000.
The precedent for this arrangement is the assumption of BLBI obligations by the government in exchange for recapitalization bonds. Other arrangements under which the Minister of Finance participates in LOLR decisions are in place in Japan, where the Minister of Finance may ask the central bank to provide loans to prevent financial turmoil, and in Jordan, where the cabinet approves the use of emergency credit facilities by the central bank.
A problem may arise if the provision of LOLR assistance delays the closure of institutions, thereby increasing the resolution costs for the deposit guarantee agency. The US introduced legislation in 1991 to limit the ability of the Federal Reserve to lend to insolvent banks even when collateral was available, in light of excessive use of these facilities in previous years.
Coverage was reduced to Rp. 5 billion in March 2006, Rp. 1 billion in September 2006, and Rp. 100 million in March 2007.
Asian and Western Hemisphere countries favor comprehensive deposit guarantee schemes, unlike European countries where central banks or regulatory bodies other than the deposit insurance agency have had clearly defined banking resolution responsibilities for a long time (Garcia, 2000).
Initial capital participation of the government amounts to Rp 4 trillion (about US$ 400 million).
Premiums are applied only to covered deposits in most countries. However, some countries are considering shifting the application of premiums to total deposits for simplicity.
This decision is independent of the one made about the use of LOLR facilities for systemically important banks.
The Australian Council of Financial Regulators operates as an informal body where members share information and views, discuss regulatory reforms or issues where responsibilities overlap and, if the need arises, co-ordinate responses to potential threats to financial stability. The Norwegian Contingency Committee for Financial Infrastructure is chaired by the central bank, which provides a secretariat, and its main responsibility is to coordinate measures for preventing and resolving crisis situations that may lead to major disruptions in financial infrastructure.
See Mishkin, Frederic; Financial Policies and the Prevention of Financial Crises in Emerging Market Countries. NBER Working Paper No. 8087, Boston, 2001.
Schinasi, Garry; B. Drees and W. Lee, Managing Global Finance and Risk, Finance and Development, Volume 36, Number 4, Washington D.C., December 1999.
There may be a legal gap in the unlikely but not impossible case that different decisions are made regarding the systemic importance of the same institution at the time of the provision of LOLR financing and at the time of the decision on what resolution approach is chosen.
A blanket guarantee could still be used, if deposit runs are not stopped by the use of emergency liquidity facilities (See Lindgren et al, Financial Sector Crisis and Restructuring: Lessons from Asia, IMF Occasional Paper No. 188, Washington D.C., 1999).
In fact, in Indonesia, the ceiling was set at a fixed margin above the average deposit rate for the largest banks between 1998 and 1999. Similar arrangements are in place in Argentina, Ecuador and Thailand. Other countries use narrower approaches: Bulgaria, Germany and Portugal regard as ineligible only individual deposits receiving preferential interest rates.