zulkarnain sitompul

ESTABLISHMENT OF INDONESIAN DEPOSITS
INSURANCE CORPORATION (LPS):EXPERIENCE
IN HANDLING CRISIS

by Zulkarnain Sitompul


Introduction
The banking crisis which hit Indonesia in 1997 indicated structural weaknesses in the banking system. There were 5 factors causing micro banking conditions to become prone to instability. First, an implicit guarantee was given by central bank to maintain the survival of banks. Second, lack of an effective monitoring system. Third, significant amount of credit extension and both direct and indirect credits to individuals/business groups related to certain banks. Fourth, weakening banking managerial capability. Fifth, lack of transparency in information regarding banking conditions.[1] Such weaknesses created moral hazards within the banking industry.
This moral hazard caused public trust vulnerability in the banking industry. The moral hazard issue become increasingly prominent since the liberalization of the banking sector in October 1998 known as “Pakto 1988”, a further liberalization in the banking sector started since June 1, 1983. The ownership structure in the banking industry contributed to the aggravating of the moral hazard issue. The Indonesian banking industry was dominated by government-owned banks originating from the colonial structure. Meanwhile, almost all private banks were owned or constituted part of big conglomerates engaging in non-banking business sectors such as property and manufacture businesses. Under such banking conditions, it is not surprising that there were many unsound practices within the banking industry ranging from activities clearly violating provisions to actions violating business ethics.
Such deteriorating banking conditions were further aggravated by unclear exit policy mechanisms and prolonged settlement of non-performing banks,[2] leading to the loss of public trust in the banking industry. This become evident when 16 banks were liquidated on November 1, 1997 causing rush in a number of banks.[3]
In mid-December of 1997,154 banks constituting half of total banking assets suffered loss of savings, at various levels. In December 1997, Bank Indonesia liquidity assistance aimed at assisting the aforementioned banks experiencing a rush increased from Rp.13 trillion to Rp.31 trillion or equaling 5% of the GDP.[4] This large-scale withdrawal was indicated by the increased amount of cash kept by the people. Based on Bank Indonesia data, the cash kept by the people increased sharply from Rp.24.9 trillion at the end of October 1997 to Rp.37.5 trillion at the end of January 1998. This amount continued to increase and reached its peak in July 1998 totaling Rp.45.4 trillion.[5]
At the point where the rupiah currency depreciated by approximately Rp.2,400,- per US$, in the middle of January 1997 to approximately Rp.14,000,- per US$ and a rush in the banking industry as well as threat of hyperinflation and destructing banking system occurred, the government stipulated a recovery strategy at the end of January 1998. Three recovery elements were implemented, namely: (1) application of blanket guarantee for all national bank customers and creditors applicable for a minimum of two years, with the purpose of recovering public trust in the banks and giving time to the government to handle the banking situation; (2) establishing I BRA (Indonesian Bank Restructuring Agency) for a limited period of time with a scope of responsibilities for handling the banking crisis; and (3) preparing the company restructuring framework.[6] One of the aforementioned restructuring programs was to establish the Indonesian deposits insurance corporation.

Implementation of Blanket Guarantee
The blanket Guarantee was stipulated in Presidential Decree No. 26 Year 1998 regarding the Guarantee for the Settlement of Obligation of Commercial Banks announced on January 27, 1998. The institution appointed to organize such insurance program was the Indonesian Bank Restructuring Agency (IBRA) starting from January up to July 1998. From August 1998 up to January 2000 this program was implemented by Bank Ihdonesia. However, since the implementation of Law No. 23 Year 1999 regarding Bank Indonesia stipulating Bank Indonesia as an independent institution, the implementation of the insurance program was returned to IBRA.
Blanket guarantee includes full commitment of the ‘government to depositing customers and most of the creditors, providing them with the assurance that their receivables would be paid. Blanket guarantee constitutes a guarantee scheme generally applied for banking systems experiencing systemic failure. The purpose of this scheme is to prevent the collapse of a banking system, namely by improving public trust in the banking industry. In addition to that, the application of the blanket guarantee was also intended to provide an opportunity for the government to conduct and complete the restructuring program.
The scope of the blanket guarantee includes on balance sheet and off balance sheet. On balance sheet consists of all third-party funds, loans received as well as short-term, medium-term and long-term commercial papers. Meanwhile, off balance sheet includes obligations arising from import transactions, other obligations based on existing UCP 500, underlying, standby L/C, bank guarantee, currency swap transactions, and Domestic Documented Letter of Credit (SKBDN).
The application of blanket guarantee started long ago in the history of the Indonesian banking system. In its initial development phase, the Indonesia banking industry was still closed, whereas the banking structure was governed by government banks. In 1988, the banking sector was liberalized by facilitating the establishment and opening of branch offices. However, such liberalization was not followed by regulations regarding comprehensive exit mechanisms such as the establishment of savings insurance, although it had been mandated by the legislators in Law No. 13 Year 1968 concerning the Central Bank. Elucidation of Article 30 of the aforementioned Law stipulates that in the context of banking development, with the aim of guaranteeing third parties’ money entrusted to the banks, insofar as possible, a deposit insurance may be introduced for creating public trust in the banking industry.
Various attempts were made to fill the vacuum caused by the absence of this deposits insurance corporation aimed at protecting depositing customers, in the following chronological order:
1. Instruction of the President of The Republic of Indonesia No. 28 Year 1968 regarding Time Deposit for Development Purposes issued on September 19, 1968 introducing Time Deposit for Development the interest rate of which is stipulated by the Government (Inpres Deposit).
2. Announcement of the Board of Directors of Bank NegaraUnit I (currently known as Bank Indonesia) No. Peng.43/DIR/68 dated September 23, 1968 regarding Government Banks Time Deposit, one of its important provision being that the Central Bank fully guarantees repayment of the aforementioned deposit (Inpres Deposit) on settlement date.
3. Decision of the Board of Directors of Bank Indonesia No. 4/8-KEP.DIR, dated July 15, 1971 regarding the Implementation of TABANAS (Savings for National Development) and TASKA (Time Insurance Savings) which were obligated for banks with interest rate determined by Bank Indonesia.
4. Decision of the Board of Directors of Bank Indonesia No. 4/32-KE.DIR dated March 22, 1972 regarding Provisions on the Amendment and Supplement of the Decision of the Board of Directors of Bank Indonesia No. 4/8-KEP.DIR dated July 15,1971, one of the most importarit provisions of it being that the payment of all form of TABANAS and TASKA is guaranteed by Bank iridonesia.
5. Decision of the Board of Directors of Bank Indonesia No. 22/63/Kep/Dir dated December 1,1989 regarding Savihgs Organization revoking the Decision of the Board of Directors of BI No. 4/8-KEP.DIR dated July 15, 1971 and the Decision of the Board of Directors No. 4/32-KEP.DIR dated March 22, 1972.
6. Decision of the Board of Directors of Bank Indonesia No. 16/7/Kep/Dir dated June 1, 1983 regarding Time Deposit in Government Commercial Banks and Indonesia Development Bank reconfirming that Bank Indonesia continues to guarantee the aforementioned deposit.
7. Circular Letter of Bank Indonesia No. 16/2/UPUM dated June 1, 1983, regarding same subject matter as the Decision of the Board of Directors No. 16/7/Kep/ Dir indicated in item 6 hereinabove.
8. Decision of the Board of Directors of Bank Indonesia No. 22/65/Kep/Dir dated December 1,1989 regarding the Revocation of Decision No. 16/7/Kep/Dir indicated in point 6, revoking the guarantee of Bank Indonesia for deposits.
9. Circular letter of Bank Indonesia No. 22/133/UPG dated December 1, 1989 regarding the organization of savings. An important provisions of this Circular Letter is that Bank Indonesia guarantee for TABANAS and TASKA is revoked. Furthermore, it is stated that in order to maintain public trust in the organization of savings, banks should maintain their liquidity, (item 3).
10. Circular Letter of Bank Indonesia No. 22/135/UPG dated December 1, 1989 regarding the revocation of Bank Indonesia Circular Letter No. 16/2/UPUM mentioned in item 7, revoking the guarantee for deposits.
11. Government Regulation No. 34 Year 1973 regarding Guarantee on Bank Savings (LN. 1973 No. 43, TLN No. 3012) constituting further implementation of Law No. 13 Year 1968. This Government Regulation issued on August 22, 1973 regulates that all banks except foreign banks are obligated to guarantee third-party money deposits in the form of demand deposit, time deposit, and savings to the government. Furthermore, it was mentioned that Bank Indonesia is the money deposit guarantee administrator at banks considering the duties of Bank Indonesia acting as a bank developer and supervisor. If a bank is liquidated, Bank Indonesia also acts as liquidator and curator. At that time, money deposits guarantee at banks was limited to a maximum of Rp.1,000,000,- (one million rupiah), an amount which is considered highly insignificant today.

The above series of regulations reflected the government’s awareness of the importance of providing guarantee for depositing customers in an effort to strengthen the banking system. However, when Law No. 7 Year 1977 regarding the Banking System was stipulated (State Gazette of the Republic of Indonesia year 1992 No. 31) on March 25, 1992 revoking Law No. 14 Year 1967 regarding Basic Principles of Banking, the intent to establish a permanent customer protection system still received inadequate attention, just as was the case with Law No. 13 year 1968.
In order to overcome the weaknesses of the above mentioned Law of Banking System, the government issued Government Regulation No. 68 Year 1996 regarding the Provisions and Procedures for Banks’ Business License Revocation, Dissolution, and Liquidation which was then replaced by Government Regulation No. 125 year 1999. However, these provisions on bank liquidation were still unable to guarantee public funds deposited in liquidated banks.

Blanket Guarantee Cost
Costs related to blanket guarantee implementation include among other things Bank Indonesia liquidity assistance (BLBI). The term of BLBI was introduced on January 15, 1998 as confirmed by the Government in the Letter of Intent to the International Monetary Fund (IMF), which was then approved by the IMF and become a requirement stipulated by the IMF.[7] BLBI is a Bank Indonesia facility used to maintain stability of the payment system and the banking sector in order to avoid disruptions due to mismatch between funds received and withdraw in banks, both in short term and the long term. In a broad sense of the word, liquidity support is liquidity assistance provided by Bank Indonesia other than Bank Indonesia liquidity credit.[8] The aforementioned liquidity assistance includes subordination credit, emergency liquidity credit, and discount facilities I and II. BLBI granted during the crisis period included liquidity assistance to banks to help them cover liquidity shortcomings particularly in the form of debit balance, discount facility and Special Money Market Commercial Papers (SBPUK), as well as escrow in the context of foreign payment obligations.[9]
During the systemic bank liquidity crisis, the Government was faced with two policy options, namely allowing banks to be imposed with the stop clearing sanction, allowing them to collapse on a large scale and within a short period of time or taking rescue action. The government opted for the policy of taking rescue action, because in a multi dimension crisis, the policy to close banks is not a realistic option. This measure constitutes part of economy recovery program based on consensus with IMF at the end of October 1997.[10]
If the decision to stop clearing had been taken, 55.2% of the overall banking industry would have been affected. Significant obligation exposure would have had to be paid, reaching approximately Rp.293.1 trillion or Rp.395 trillion, involving a total of 12.6 million accounts and 2,220 offices. The domino effect that may have occurred is if the aforementioned banks clearing had been stopped, would have included inter bank claims of approximately Rp.29.4 trillion not being paid, which in turn would have created negative impacts on banks owning claim. In the real sector, the halting of clearing would have interrupted most of the payment system, causing the discontinuation of all trade traffic.
The of the option of closing the banks were estimated to achieve Rp.395.0 trillion, not to mention social instability costs arising due to public panic. It is important to note here that banks were facing on illiquid rather than insolvent situation, indicating that in a rush condition, even sound banks would not have been able to handle liquidity problems without the Government’s assistance.
The following table indicates reasons for not closing banks and for applying blanket guarantee:

If assistance had not been provided to the banking industry, there would have been a rush totaling Rp.454.4 trillion (December 1997) or Rp.680.2 trillion (December 1998), much greater than the total value of BLBIs, namely Rp.48.8 trillion (December 1997) and Rp.147.7 trillion (December 1998) respectively.
Meanwhile, the banking sectors foreign debts using foreign exchange also created a pressure of their own. The trust of overseas banks in domestic banks (in the context of trade) decreased due to the Rupiah depreciation causing arrears in foreign debt payments and in the context of overseas trade, totaling Rp.77.6 trillion (December 1997) and Rp.95.7 trillion (December 1998) respectively. Consequently, the credit line to domestic banks was stopped and L/ Cs issued by banks in Indonesia were no longer accepted.[11]
As a solution, the Government through the Frankfurt Agreement, made an agreement with overseas debtors for them to re-open such credit line and to restructure bank offshore debts. Therefore, creditors required the Government to settle the arrears of trade finance and offshore debts of the banks. The commitment or agreement was made by the Government, but considering the limited funds owned by the Government, Bank Indonesia was requested to make payment, resulting in the creation of BI escrow funds in the context of arrears payment obligation in trade finance and offshore debts of banks.
The total amount of BLBIs distributed reached Rp. 144.54 and can be categorized into several policies. First, BLBI aimed to handle bank liquidity problems, namely debit balance, SBPUK and discount facilities (Rp. 129.40 trillion). Second, in the context of payment of all remaining public funds deposited in 16 Banks Under Liquidation and Banks Freezing Operations (Rp.6.015 trillion). Third, BLBI in the form of escrow funds for the payment of trade finance arrears to overseas creditors (Rp.9.13 trillion). The first category was implemented based on the Government’s policy not to halt clearing, while the second and the third categories were implemented based on the Government’s insurance policies either in the form of blanket guarantee (Presidential Decree No. 26 year 1998) or overseas guarantee (Presidential Decree No. 120 year 1998).

Establishment of the Indonesian Deposits Insurance Corporation (LPS)
The banking system resilience stabilization program for is conducted simultaneously with the restructuring of banking institutions by creating favorable conditions for the establishment of a strong banking system. The above condition is created by improving infrastructure, enhancing the quality of the banks’ management (good corporate governance), and revamping banking regulations and supervision.
It is necessary to create a conducive environment in order to improve the conditions of the banking system which is in the restructuring process. Such improvement included, among other things, the establishment of the Indonesian Deposits Insurance Corporation (LPS) replacing the Government insurance program.
The policy to establish a deposit insurance institution was set forth in Article 37B Law No. 10 Year 1998 stipulating that banks are obligated to guarantee public depositing in banks and therefore it is necessary to establish a savings insurance based on Government Regulation.
Although the establishment of the Indonesian Deposits Insurance Corporation was mandated by a Government Regulation, as a follow-up on the mandate granted in Article 37 B, the government issued Law No. 24 Year 2004 regarding the Indonesian Deposits Insurance Corporation (LPS) dated September 22, 2004 which came into effect on September 22, 2005. This Law stipulates LPS as a public institution adopting independent, transparent, and accountable principles in performing its duties and implementing its authorities, and is responsible to the President.
Law No. 24 Year 2004 further enhanced the LPS functions and authorities, no longer limiting it to providing customers deposit guarantee, but also to include the function of maintaining the stability of the banking system. In performing its functions, LPS also takes part in formulating, stipulating, and implementing non-performing bank settlement policies with no systematic impacts, and in implementing non-performing bank settlement policies which have systematic impacts. In general, the LPS has two main duties, namely acting as a guarantor of customers’ deposit in a bank, and as liquidator of non-performing banks.

a. LPS As Customer Funds Insurer
As an insurer of customers funds deposited in banks, the LPS has similar functions as guarantee (borgtochi) known in civil law. In addition to that, the LPS is also similar to insurance. Article 1820 of The Indonesian Civil Code defines guarantee as an agreement to which a third party, for the interests of the debtor, binds himself/herself to fulfill the debtor’s commitment, when this person is unable to comply with his commitment. Guarantee agreement is supplementary in nature (accessoir). The existence of guarantee agreement depends on the existence of another agreement. From this point of view, it can be stated that LPS is a guarantee (borgtoch), with the difference that the existence of the LPS is not based on another commitment.
The LPS can also be deemed as similar to insurance. Article 246 of the Indonesian Commercial Code stipulates that coverage shall be an agreement under which the insurer binds himself/herself to the insured by receiving premium, providing indemnity to him/her due to a loss, damage, or loss of expected profits, which may be suffered by him/her as a consequence of an incident. Furthermore, Article 1 sub-article 1 of Law No. 2 Year 1992 regarding Insurance Business defines insurance or coverage as an agreement between two or more parties, under which the insurer binds himself/herself to the insured, by receiving premium, to provide indemnity to the insured due to loss, damages, or loss of expected profits or legal responsibilities to the third parties which may be suffered by the insurer, arising due to an uncertain incident, or to make a payment based on the demise or life of the insured person.
Based on the above definition of insurance, it can be concluded that the LPS is similar to an insurance company. However, there are at least four diflFerences between the LPS and insurance. First, a bank’s bankruptcy is not an individual event, meanwhile the insured coverage in an insurance is a specific event. Second, general insurance is aimed at protecting against risks arising due to an act of God or other parties’ acts failing to be controlled by the insured. Meanwhile, banks’ bankruptcy is frequently caused by their own acts, namely mismanagement. Third, the main objective of LPS is not only to guarantee customers’ deposits, but also to guarantee the survival of the individual banks’ business. Fourth, the LPS is fully supported by the government. Meanwhile, the government does not usually support insurance companies.

b. LPS as Deposits Insurance Scheme Administrator
The LPS is a legal entity which is independent, transparent, accountable, and responsible to the President. The insurance policy has certain impacts on the banking and fiscal sectors, therefore, there are representatives of the respective competent authorities of the banking and fiscal sectors in the LPS. The purpose of the involvement of the above authorities’ representatives is to formulate the insurance policy jointly in order to make sure that it is supported by above sectors. Nonetheless, the implementation of the aforementioned policy becomes the full responsibility and authority of the LPS, without interference by any other parties whatsoever.
The LPS organization consists of the Board of Commissioners and Chief Executive. In this case, the Board of Commissioners are the top management of the LPS with the competence to formulate and stipulate policy, as well as to conduct oversight in the context of the implementation of the duties and authorities of the LPS. This Board of Commissioners is chaired by a Head of Board of Commissioners, consisting of: (a) one echelon I official of the Department of Finance appointed by the Minister of Finance; (b) one member from the management of the Banking
Supervisory Agency (LPP) appointed by the head of LPP[12]; (c) one member from Bank Indonesia management appointed by the head of Bank Indonesia, and (d) three members coming from internal and/or external LPSs. The rules and procedures for the implementation of the duties and authorities of the Board of Commissioners is stipulated by the Decision of the Board of Commissioners. A member of the Board of Commissioners is appointed as the Chief Executive to perform the operational activities of the LPS. The Chief Executive’s duties and authorities are stipulated by the Decision of the Board of Commissioners.

LPS ORGANIZATIONAL STRUCTURE
Member Ex Officio Department of Finance
Another equally important issue is the providing of legal protection for the Board of Commissioners and employees of the LPS. Employees performing their work in good faith need to be protected against suits and criminal claims. With regard to this immunity, the LPS Law stipulates that in resolving and handling failed banks, the LPS has authorities to: (1) take over and perform all rights and responsibilities of shareholders, including the rights and authorities of the General Meeting of Shareholders (GMS); (2) control and manage the assets and responsibilities of non-performing banks being secured; (3) review, cancel, terminate, and/or change every contract binding non-performing banks by third parties harmful for the bank concerned; and (4) sell and/or transfer bank assets without the prior approval of debtors and/or bank liabilities without the creditors’ approval.
In the meantime, Article 79 of the LPS Law stipulates that with respect to court decision which have obtained permanent and binding legal force, members of the Board of Commissioners or former members of the Board of Commissioners, Chief Executive or former Chief Executive, and/or employees of the LPS or former employees of the LPS, are obligated to indemnify other parties. However, insofar as the relevant person performs his/her duties, authorities, and/or the aforementioned functions are in accordance with the laws and regulations, the LPS shall pay the compensation concerned, and case fees are to be borne by the LPS. The Board of Governors and the officials of Bank Indonesia also have the above immunity.[13]

c. Funding
Funding arrangement plays the most critical role in designing a deposits insurance system. A good design for such system must be able to guarantee the availability of adequate funds in order to duly encounter problems arising. The lack of funds may delay the banks’ liquidation process and increase cost significantly. The design of funding arrangement will determine whether the banking industry is required to pay deposits insurance fees when such banking industry is in a sound condition or when it encounters problems.
The LPS Law stipulates that the initial capital of the LPS is to be no less than Rp.4,000,000,000,000.00 (four trillion rupiah) and not more than Rp.8,000,000,000,000.00 (eight trillion rupiah). The LPS’s assets, both in the form of investment and non-investment, are separated state’s assets and the LPS is responsible for the management and administration of all of its assets.
Subsequently, Government Regulation No. 32 of 2005 regarding LPS’s Initial Capital stipulates that: (1) the initial capital of the LPS is Rp.4,000,000,000,000.00 (four trillion rupiah); (2) the initial capital concerned is in the form of cash and is a separated state asset; (3) such initial capital originates from the Minister of Finance’s account No. 502.000002 on behalf of the State Treasurer for Bond purposes in the context of Insurance in Bank Indonesia; and (4) the accounting balance sheet of the LPS is determined by the Board of Commissioners of the LPS.
Based on the survey conducted by the IMF, most of the insurance systems operate based on adequate funds availability which can be used directly in the event of a bank’s bankruptcy. The availability of adequate funds increases public trust under conditions of financial system instability. In addition to the above, such funds can also be invested insofar as they have not been used for covering potential losses in the event of a bank’s bankruptcy.
A deposits insurance corporation requires adequate funding both ex ante or ex post, and it is better if such funding is obtainable from its members’ contribution. The IMF survey found that 58 deposits insurers had adequate insurance funds for assisting the insurers to pay their depositing customers immediately. On the other hand, 9 deposits insurances, namely in Austria, Bahrain, France, Gibraltar, Italy, Luxembourg, the Netherlands, Switzerland, and England are charging fees on ex post basis to surviving banks when the depositing customers of liquidated banks must be paid. Gibraltar and England have also some funds to pay for administrative costs and depend on ex post assessment in paying depositing customers of a bankrupt bank.
Deposits insurances need independent funding in order to improve the capability of bankers to maintain the soundness of their banks. Such funds must be adequate to fulfill all demands under normal conditions. There are 68 countries having deposits insurances which have at least a portion of independent funds and only two countries, namely Chile and The Republic of Dominique, which fully depend on their government funds. A scheme which depends on fund accumulation must charge its members with adequate premium in order to be able to finance the scheme concerned. The amount of funds that must be kept by a deposits insurance range from the lowest rate of 0.4% of the deposits such as applied in Italy, to the highest rate of 20% as applied in Kenya. In the United States of America, the FDIC does not apply premium to the very sound banks if they manage funds above the target, namely 1.25% of the insured deposits.
The premium amount required to maintain the availability of adequate funds depends on banking system conditions and its future prospects. In 1999, the premium charged to banks varied from (temporarily) 0%, 0.005%, and 2% of deposits at extremely sound banks in the United States of America, Bangladesh, and Venezuela respectively.

d. LPS Membership
All banks engaging in business activities within the territory of The Republic of Indonesia are obligated to become members of the LPS, including branch offices of banks having their domicile overseas and conducting their business activities in Indonesia. While branches of national banks doing their business overseas are not .members of the LPS. In order to become a member, banks are obligated to submit: 1) a copy of the bank’s articles of association and/or deed of establishment; 2) a copy of the bank’s operational permit; 3) a statement on the level of soundness of the bank issued by Bank Indonesia; and 4) a statement by the board of directors, commissioners, and controlling shareholders on the commitment and willingness to comply with all provisions set forth in the LPS Regulations, the willingness to be personally responsible for any failure and/or tort causing damages or jeopardizing the bank’s business continuity, the willingness to release and transfer all rights, ownership, management, and/or interests to the LPS in the event that the bank becomes a failed bank and a decision to secure or liquidate it has been made.
In addition to that, any bank participating in insurance program is also obligated to: 1) pay participation contribution in the amount of 0.1% (one per mil) of the bank’s equity at the end of the previous fiscal year or of the paid-up capital for new banks; 2) pay insurance premium; 3) submit periodical reports in accordance with the stipulated form; 4) provide data, information, and documents needed in the context of insurance implementation; and 5) keep evidence of its membership or a copy thereof at the bank’s office or other premises to ensure that the public can be easily informed.

e. Duties and Functions of the LPS
The LPS has the duties to insure deposits of the depositing customers and actively involve in maintaining the banking system stability, in accordance with its authorities. In performing the above functions, the LPS has the following duties: (1) formulating and stipulating policy on deposits insurance implementation; (2) conducting deposits insurance; (3) formulating and stipulating policy in the context of actively involving in the maintenance of the banking system; (4) formulating, stipulating, and implementing failed banks settlement policies which have no systemic impacts; and (5) handling of failed banks which have a systemic impacts.
In the meantime, in implementing its functions and performing its duties, the LPS has the following authorities: (1) stipulate and collect insurance premium; (2) stipulate and collect contribution fees at the banks’ initial membership; (3) manage the LPS’s assets and liabilities; (4) obtain customers’ deposit data, data regarding the soundness of banks, banks’ financial statements, and report on the banks’ audit insofar as it does not violate banking confidentiality principles; (5) reconcile, verify and/or confirm data; (6) determine prerequisites, procedures, and provisions regarding claim payment; (7) appoint, authorize, and/or assign other parties to act for the interests and/or on behalf of the LPS in performing part of particular duties; (8) disseminate information to banks and the public concerning deposits insurance; and (9) apply administrative sanctions.
For the settlement and handling of banks, the LPS has the following authorities: (1) take over and perform all rights and responsibilities of shareholders, including the rights and authorities of the GMS; (2) control and manage assets and responsibilities of non-performing banks being secured; (3) review, cancel, terminate, and/or change every contract binding on non-performing banks secured by third parties harmful for the bank; and (4) sell and/or transfer bank assets without the prior approval of debtors and/or bank liabilities without the creditors’ approval.
With respect to resolving and handling failed banks, in accordance with its duties and authorities, the LPS may conduct failed banks settlement with systemic impacts and without systemic impacts, as well after the Banking Supervisory Agency (LPP) and or the Coordination Committee deliver their settlement to the LPS. The decision to secure failed banks is based on the estimated costs required to secure the same, including the increase of capital enabling banks to meet their solvency and liquidity level. However, if the LPS decides not to secure a bank, it shall calculate the cost of customers deposits payment being insured, bridge funding for payable salaries as well as employees severance, and estimated LPS’s revenue from the sale of the assets of the bank the permit of which has been revoked.
If the re-review, revocation, termination, and/or contract change by the LPS cause loss to a party, the relevant party may only claim for compensation which does not exceed the benefit gained under such contract after he/she is able to prove such loss in an obvious and clear manner. In such case, the costs of litigation at court, namely legal assistance fees in such compensation assertion case for members of the Board of Commissioners or former members of the Board of Commissioners, Chief Executive of former Chief Executive, and or the LPS’s employees or former LPS’s employees, as well as case fees stipulated by the court are to be borne by the LPS.
The LPS Law stipulates that the LPS is obligated to pay insurance claim to depositing customers of the bank the business permit of which is revoked. Following to reconciliation and verification, the LPS determines deposit which is eligible for payment as well as deposit not eligible for payment. A customer deposit is eligible for payment in the following events: (1) data on deposit customers is not recorded at the bank; (2) depositing customers are a party benefited unfairly; and (3) depositing customers are a party causing the bank to become unsound. If depositing customers feel that they have been harmed, the customers concerned can submit an objection to the LPS with obvious and clear evidence, or take legal action through the court.
Failed banks the business permit of which has been revoked can be liquidated the LPS and shareholders. In liquidating banks, the LPS takes the following action: (1) perform all authorities in failed banks settlement and handling; (2) provide bridge funding for the payment of employees’ payable salary as well as for employees’ severance pay in the amount of minimum severance as stipulated in the laws and regulations; (3) take any necessary action in the context of securing banks assets prior to the liquidation process; and (4) decide liquidation of the bank legal entity, establish the liquidation team, and stipulate the bank’s status as bank under liquidation. Meanwhile, banks the business permit of which has been revoked based on their own shareholders’ request are to be liquidated by the relevant shareholders. In this case, the LPS does not pay the insurance claim of depositing customers of the aforementioned banks.
Furthermore, the curator or liquidator of a bank being liquidated are always advised not to pay a customer’s deposit in full, but rather to set-off the deposit amount concerned as payment of the customer’s liabilities to the bank. The setting-off the due date of loan is an appropriate action. However, setting off the current loan can ruin a performing business activity due to difficulties in obtaining immediate substitute working capital.
In the event that depositing customers have liabilities to the bank simultaneously, insurance claim is paid after the aforementioned liabilities have been calculated based on laws and regulations. In such case, two considerations must be taken into account prior to set-off. First, providing incentive to debtors and depositing customers as well as other bank creditors for the payment of their loan at that time or in the future in order to maintain their trust in the banking system. Second, minimizing the costs of the deposit insurer.
If a depositing customer also acts as the debtor of a particular liquidated bank, his/her deposit must be set-off against his/her loan only if his/her aforementioned loan has become due or is non-performing. It is not fair for other depositing customers or other creditors to leave non-performing debtors, particularly those contributing to the bank’s bankruptcy, to enjoy the insurance benefit of the deposit insurer. Therefore, the customer’s deposit must be set-off against his/her aforementioned non-performing as well as matured loan. Meanwhile, the set-off applied to debtors with performing collection ratio means unfairly eliminating their working capital and threatening their business continuity.
Another problem caused by set-off is the provision of priority right to debtors over assets of liquidated banks as opposed to depositing customers. By conducting set-off, debtors receive immediate payment of 100 percent of their deposit amount, meanwhile other depositing customers must wait to receive part of their deposit (within the insurance limit). It may create bad practices, leading customers to borrow huge amounts of money shortly before the revocation of the bank’s business permit. Therefore, the aforementioned customer will enjoy the full insurance. However, conducting set-off on loan which reaches its maturity date against deposits guaranteed by insurance may decrease the costs of the deposit insurer.
With regard to set-off, the LPS Law stipulates that set-off/ compensation may only be done towards the debtors’ liabilities, which reach their maturity and or become default/non performing. For example, A has a deposit in the amount of Rp.200,000,000.00 (two million rupiah) and liabilities in the amount of Rp.25,000,000,000.00 (twenty five million rupiah). The insured deposit owned by A is Rp. 100,000,000.00 (one hundred million rupiah), but the payable amount is Rp. 100,000,000.00 (one hundred million rupiah) -Rp.25,000,000,000.00 (twenty five million rupiah) = Rp.75,000,000,000.00 (seventy-five million rupiah).

f. Insured Deposit
The LPS stipulates that deposit is deposit as set forth in the Banking Law. Article 1 sub-article 7 of Law Number 10 of 1998 regarding Banking stipulates that:
“Deposit shall be sum of money entrusted by public to banks based on funds deposit agreement in the form of demand deposit, time deposit, deposit certificate, savings, and or other forms deemed equal to thereof.”
Article 10 of the LPS Law stipulates that the LPS insures banks’ customers deposit in the form of demand deposit, time deposit, deposit certificate, savings, and/or other equivalent forms. Article 11 of the aforementioned law also explicitly stipulates that the deposit amount being insured for each customer in a particular bank shall be a maximum of Rp. 100,000,000.00 (one hundred million rupiah). This insured deposit amount may be changed if one or more of the following criteria are fulfilled: (1) there is a significant simultaneous withdrawal of banking funds; (2) there is a rather significant inflation rate for several years; and (3) the number of customers with an insured total deposit becomes less than 90% (ninety percent) of the number of depositing customers of all banks. The change in the quantity of the insured deposit value must be consulted with the People’s Legislative Assembly and the results of such consultation are stipulated farther by a Government Regulation.
Elucidation on Article 10 of the LPS Law stipulates that incoming and outgoing transfers as well as collections are not insured considering that they are not deposit. However, outgoing transfers from customer deposit which not transferred out of the bank are still considered as deposit. The incoming transfers for a customer received by the bank are also deemed as deposit of such customer although the bank has not recorded it yet in the account of the relevant customer. Under each customer guarantee, customers may spread their deposits at several banks without increasing the risks encountered by a bank.
The calculation of insured deposit based on e LPS Regulation Number l/PLPS/2005 is as mentioned below. For example, Ali has a private savings account at Bank XYZ with the balance of Rp.80 million. Ali also has a consolidation account with Budi and Cici in the form of a demand deposit at Bank XYZ with the balance of Rp.225 million. In addition to that, Budi has a private savings account at Bank XYZ with the balance of Rp.25 million. Meanwhile, Cici has one private savings account with the balance of Rp.65 million and one account for the interest of her child, Titi (beneficiary) with the balance of Rp.45 million.
If the business permit of Bank XYZ is revoked in 2008 on the assumption that the deposit amount being insured for each customer of respective bank is maximum Rp.100 million, the calculation of the deposit amount being insured for the respective customer is as follows:

The LPS will pay insurance claim on deposit being insured in the following amounts, respectively: Rp.100 million to Ali, Rp.100 million to Budi, and Rp.145 million to Cici. The non-insured deposit in the amount of Rp.95 million will also be settled through the liquidation process of Bank XYZ.
Referring to the above, deposits owned by institutions acting as “trust” holders, such as pension funds, are regulated individually. Deposits owned by pension fund institutions can be insured up to the total amount of pension funds under their management. With respect to this matter, Article 24 paragraph (3) of The Indonesia’s Deposits Insurance Corporation Regulations stipulates that, if a customer has an account, which is stated in writing, for the purpose of other parties’ interest (beneficiary), the balance of such account is taken into account as the balance of the other relevant parties’ (beneficiaries’) account. The limit of the insured amount is rather low so that customers who have significant amounts of deposit try to attain adequate knowledge for assessing the financial capacity of their bank. The IMF offers the limit of insured amount of one or two times of per capita GDP as a rough estimation (rough rule of thumb). An IMF survey conducted in countries implementing the deposit insurance scheme indicates that the average amount insured is 3 times per capita GDP, with the highest insurance rate in Africa, and the lowest one in Europe. Up to 1999, the country providing the highest insurance rate was Oman, namely 8.8 times per capita GDP. However, Chad which was established in 1999, provided the highest insurance rate, namely 14.5 times per capita GDP. The lowest insurer ratio was provided by Macedonia, namely 0.1% of per capita GDP.
The current maximum amount of insured customers deposit in Indonesia is Rp. 100,000,000,- (one hundred million rupiah). Under such insurance amount, the main objective of the establishment of deposits insurance corporation, namely to protect small-scale depositing customers, is achievable. It is estimated that with such amount, 90% of depositing customers have been protected. This value is predicted to be equal to 10 times per capita GNP that with the annual average inflation rate of 8-9%, and so it is expected that within the next 10 years this value will be equivalent to 3 times per capita GDP, or close to IMF’s rule of thumb, which is 1-2 times per capita GDP, or the average international insurance which is 3 times per capita GDP. Most of the respondents (86.45%) in a survey conducted by Bank Indonesia and the University of Gajah Mada preferred not to limit the maximum insured amount. Such response must be observed as it may potentially aggravate the moral hazards.
In relation to deposit payment, the LPS Law strictly stipulates that if the data on deposit customers is not recorded at the bank, LPS will not pay claims on the deposit concerned. Customers who feel they have been harmed may submit an objection to the LPS or the court. If the LPS accepts the customer’s objection, the LPS will only pay the aforementioned customer’s deposit in accordance with the insurance, along with reasonable interest. The clarification regarding the type of guaranteed deposit is expected to facilitate claim payment by LPS. Besides, this definition clarification will also facilitate the Indonesia Deposits Insurance Corporation to calculate premium which must be paid by members. The types of guaranteed deposit by the Indonesia deposits insurance corporation include the following:
1) All types of deposits including demand deposit, time deposit, and savings in rupiah currency;
2) Principal and interest. The guaranteed interest is calculated based on book records as of the date of bank closing. Depositing customers in a non-performing bank generally receive higher interest, therefore LPS stipulates the maximum interest included in the insurance program.
3) Deposits in foreign exchange. Guarantee is intended to prevent capital flight or flight to quality. However, by guaranteeing deposit in foreign exchange, the Indonesia deposits insurance corporation is likely to encounter exchange rate risks. Therefore, it can be stipulated that claim payment will be conducted using rupiah currency based on the exchange rate prevailing at the time when the bank is transferred to the deposit insurance institution.
In order to provide time for the banking industry and public, the transitional period from blanket guarantee to limited guarantee by LPS is stipulated as follows:
a for a period of 6 months as from the applicability of the LPS Law all deposited amounts are guaranteed,
b. in the subsequent 6 months, the amount guaranteed is maximum Rp.5 billion,
c. in the subsequent 6 months, maximum amount guaranteed is Rp. 1 billion and
d. after 18 months as from the applicability of the LPS Law, the maximum amount guaranteed is Rp. 100 million (As from March 22, 2007).

g. LPS Premium System
There are two methods in determining premium, namely the flat rate and the risk-based premium system. It is believed that the flat-rate system can potentially create incentive for banks to increase the risk in their portfolio. In general, market actors are faced with risk-return trade-off considering that great profits can only be gained at the cost of high risks.[14]
Therefore, many countries have shifted from the flat-rate system to the risk-based premium system. In 1995, there were only two countries which applied this system, while in 1999 one-third of 72 countries shifted to the risk-based premium system. Risk-based premium is determined based on the variable premium theory taken from traditional theory of moral hazard, stating that moral hazard can be overcome by determining different premium cost for respective customers depending on the risks being faced by the customers concerned.[15]
The fundamental problem related to the application of risk-based premium is how to determine risks being faced by a bank appropriately. There are two usable systems for resolving the above problem, namely market-based information and non market-based information systems. The ideal solution is by determining insurance premium reflecting differences among banks within their estimated costs, consisting of among other things: the cost for settling bank’s bankruptcy, supervising cost, monitoring cost as well as auditing cost, and third parties’ cost borne by institutions other than the deposits insurance corporation. Consequently, the deposits insurance corporation must possess clear information concerning the types of risk faced by banks.[16]
Conceptually, using market information is beneficial because such information represents the evaluation of certain individuals who are risking their money while trying to assess a bank’s risks. However, the use market information as a basis of insurance premium leads to a question regarding the quality of market information which can be obtained, as well as whether such market-based scheme is aimed at accurate price determination. This approach has a particular information problem considering that determining premium based on interest rate paid by un-insured deposit requires an advance market both for large- and small-scale banks.
If the market information is not used in determining insurance premium value, such premium must be determined on an administrative basis, both explicitly and implicitly. It raises the question of the level of public trust in risks accuracy stipulated by the regulator. Assessing the appropriate risk level of a bank in ex ante manner may be more complex, considering that the insured party nearly always has better information concerning potential risk being faced than the insurer. From the point of view of the bank, assessing the financial risks of a loan is the main function of the bank, therefore on an ex ante basis there is an increasingly wider information gap between the insured party and the insurer. Some analysis concludes that the risk-based premium system may be able to function properly if it applies the ex-post risk level.
The ex-post method applying the amount of non-performing credit must be applied carefully. A balance must be achieved between the willingness to apply penalties in order to prevent an excessive risk taking and applying a large amount of penalties which can aggravate the banks’ condition. Realistically, applying the ex-post system in determining risk has certain obstacles related to the amount of penalty applicable to high-risk banks. If the risk can be detected before the banks’ performance collapses, a relatively significant penalty can be applied without threatening the banks’ condition. However, a large amount of penalty applied to non-performing banks may lead to the banks’ bankruptcy.
In order to overcome this problem, instead of applying the maximum penalty to high-risk banks when the banks are in a bad financial condition, a part of such penalty can be applied after the bank recovers. During a period when the bank is classified as high-risk but solvent, a lower penalty can be applied and tight supervisory measures can be implemented in order to reduce the bank’s risk profile.[17]
Another method in determining the premium payable by banks which are members of the deposits insurance corporation is based on the market-based portfolio monitoring theory. According to this theory, the securities market is able to efficiently evaluate the level of banks’ portfolio risk. This theory requires all banks exceeding a particular size to issue long-term debentures traded on the market. The deposits insurance corporation furthermore extrapolates a level of portfolio risk of such banks and the portfolio related to the premium of the deposits insurance corporation based on market price where such bank debentures are traded. The premium of small-scale banks can be determined by comparing it to the premium of banks which are obligated to issue such debentures. The weakness of this theory is the division of banking industry, namely into large—scale banks required to issue debentures and small-scale banks.[18]
Some experts are proposing to apply the soundness level assessment system used the banks’ supervisory board, namely the CAMEL system, for the assessment of risk being faced by banks. The banks’ supervisory board uses CAMEL in evaluating the quality of capital, assets, management, earnings, and liquidity. The risk-based supervision system as an improvement of the CAMEL system has been applied by Bank Indonesia in conducting banks supervision, and it is expected to support the mechanism for determining deposit insurance premium. This supervision system has been established in consideration of various types of products offered by banks. The CAMEL system is unable to absorb the assessed factors of such products. The assessed risk-based supervision is extended to include the factors of capital, assets qualities, market risk, earnings, liabilities, business, internal control, organization, and management, usually abbreviated to CAMELB & COM.[19] Based on a survey conducted by Bank Indonesia and UGM, 83.10% of the respondents agreed with the application of the risk-based premium system. However, the risk-based premium system can only be implemented if the supervision and reporting system formulated by banks is reliable, otherwise it is better to implement the flat-rate system in order to avoid unfairness in determining premium due to the weaknesses in the risk assessment system. Based on the above considerations, the LPS has been applying • the flat-rate premium system. Article 13 of the LPS Law stipulates premium in the amount of 0.1% (one per mil) of the average monthly balance of total deposit in each period. This flat-rate system can be changed to risk-based system after consultation with the People’s Legislative Assembly.
The LPS Law stipulates that insurance premium is payable twice a year, namely in the amount of 0.1% (one per mil) of the average monthly balance of total deposit in each period. The insurance premium can be increased or reduced in accordance with the realization of the average monthly balance of total deposit in the relevant period. Therefore, the inter bank premium rate may differ based on the scale of banks’ failure risk. Although premium calculated by banks, the LPS is authorized to verify such bank premium calculation.
Furthermore, the LPS Law stipulates the following: (1) methods of determining premium can be changed, so that a different premium level is applied among banks based on the scale of the bank’s failure risk; (2) if a different premium level is determined among banks, the range between the lowest premium and the highest one should not be more than 0.5% (five per mil); (3) the change in the methods for determining the premium and premium level based on such scale of banks’ failure risk should be consulted with the People’s Legislative Assembly; and (4) the result of consultation with the People’s Legislative Assembly is to be further stipulated in a Government Regulation.
An example of insurance premium calculation based on Regulation of LPS Number l/PLPS/2005 is provided below.

Bank XYZ has a monthly deposit balance for the period of July 1,2005 up to June 30, 2006 as indicated in following table.
Remarks:
1. The premium for the beginning of the period from January 1, 2006 up to June 30, 2006 payable by Bank XYZ is Rp.12 million, calculated as follows:
= 0.1% x average monthly balance of the previous period
= 0.1% x Rp. 12,000 million
= Rp.12 million
2. At the end of the period of January 1, 2006 up to June 30, 2006, the amount of premium paid is adjusted to the premium calculated based on the realization of the average monthly balance for the relevant period. The premium which should become the cost of Bank XYZ for the period of January 1, 2006 up to June 30, 2006 totals Rp.14 million, calculated as follows:
= 0.1% x average monthly balance for the relevant period
= 0.1% x Rp. 14,000 million
= Rp.14 million
3. Bank XYZ has a shortfall in the premium payment for the period of January 1, 2006 up to June 30, 2006 in the amount of Rp.2 million [Rp. 14 million - Rp.12 million] which will be calculated in the premium payment of the next period.
4. The premium at beginning of the period from July 1, 2006 up to December 31, 2006 payable by Bank XYZ totals Rp.14 million, which is calculated as follows:
= 0.1% x average monthly balance of the relevant period0
= 0.1% x Rp. 14,000 million
= Rp. 14 million
After added by the premium shortfall in the previous period in the total amount of Rp.2 million, XYZ Bank must pay a premium in the amount of Rp. 16 million [Rp. 14 million + Rp.2 million] by no later than July 31, 2006.

h. LPS as Liquidator
If the LPS decides not to secure a non-performing bank, the LPS is to notify BI to revoke the business permit of the aforementioned bank. Furthermore, as from the revocation of the business permit of such bank, the LPS is to handover and perform all rights and authorities of the shareholders, including the rights and authorities regarding GMS in the context of bank liquidation. As a l! consequence of the handing over of the rights and authorities regarding GMS, the LPS is to make immediate decisions regarding the following matters:
a liquidation of the bank legal entity;
b. the formation of the liquidation team;
c. stipulating the banks’ status as “bank under liquidation”; and
d. non-activating all members of the board of directors and commissioners.
After the formation of the Liquidation Team, all responsibilities and management of Banks under Liquidation are I performed by the Liquidation Team. Therefore, the board of directors J and commissioners of the bank become non-active except for ulfilling their obligations. Therefore, they are not allowed to resign from their position prior to the completion of banks’ liquidation, except with the LPS’ approval. Non-active Board of Directors and Commissioners are not entitled to receive income in any form whatsoever from the Bank Under Liquidation.
One of the LPS weaknesses is the lack of regulation regarding authority to handle banks being liquidated based on the shareholders’ initiative (self liquidation). Meanwhile, the regulation dealing with liquidation initiated by the shareholders, namely Government Regulation No. 25 Year 1999 regarding Business Permit Revocation, Dissolution, and Liquidation of the Banks, has been revoked by Law No. 24 Year 2004 regarding LPS. Accordingly, there is legal void in the resolution of the liquidation of banks initiated by the shareholders.
In addition to serving as liquidator, the LPS also plays a pivotal role in securing banks declared as failed banks by the bank oversight institution namely Bank Indonesia (BI). If a non-systemic bank is declared as a failed bank by BI, the LPS is to conduct assessment in order to determine whether such bank is to be liquidated or rescued. A bank with no systemic impacts will be rescued by the LPS if the costs are significantly lower than the estimated costs of no safety action being taken and if the bank to be rescued still indicates good business prospects. Rescue efforts may either include or exclude old shareholders.
For failed banks with systemic impact, rescue action can include old shareholders (open bank assistance) or exclude old shareholders. To include shareholders in rescuing banks with systemic impact, the shareholders of the bank must deposit a capital of not less than 20% of the estimated costs of rescue. A Coordination Committee consisting of representatives of Bank Indonesia, the Minister of Finance and LPS has the competence to determine whether a bank is a systemic bank or non-systemic bank.
If the LPS decides to conduct rescue a bank, the shareholders and management of such bank will release and transfer to LPS all rights, ownership, management, and/or other interests in the intended bank, and cannot press charges against the LPS or parties appointed by the LPS if the rescue process is unsuccessful, insofar as the aforementioned rescue process is performed in accordance with the applicable rules and regulations.
The LPS is obligated to sell all of the bank’s shares rescued by it, by no later than three years as from the commencement of the eiforts for rescuing the failed bank. If necessary, this time frame can be extended.

Conclusion
There are two basic differences between guarantee provided under the blanket guarantee program and the guarantee provided by the LPS. First, difference in the context of scope. Second, the amount guaranteed. The Blanket guarantee secures almost all of a bank’s obligations with unlimited guarantee amount (the sky is the limit). Meanwhile, guarantee provided by the LPS includes only public deposits in the bank (depositor) with a specified amount, namely a maximum of Rp.100 million.
Theoretically, the LPS which substitutes blanket guarantee is one of financial safety net components. In general, the financial safety net consists of prudential regulations, supervision, lender of last resort, and deposits insurance corporation. The existence of LPS is aimed at enhancing customers’ trust in the banking industry and has the following purposes: First, to minimize potential rush; Second, to protect small-scale depositing customers who are socially and politically unable to bear the burden posed by a banks’ bankruptcy; and Third, seek solutions for minimizing the social and political costs of banks’ bankruptcy.
An important matter which needs to be taken into account is that LPS is not a “panacea”. This system, too has its own weaknesses. Therefore, it must be supported by three components, namely: monitoring, internal governance, and market discipline. Monitoring conducted by the central bank must be strengthened by internal discipline of the banking system and of external discipline (market). Without such discipline, monitoring will not able to keep pace with liberalization, globalization, and technological advancements in financial instruments. By involving internal governance, the banking sector itself must become the best place in managing and maintaining sound management practices.
Meanwhile, market discipline is required, because without a competitive and punitive market for those who fail to compete in the market, there will not be adequate incentives for banks owners, management and customers to take appropriate financial decision. Market discipline requires a conducive transparent climate. Therefore, provisions regarding transparency applicable in the banking system are being re-reviewed. It is only with these complementary measures that the existing weaknesses of the LPS system can be minimized.

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Foot Note
[1] Bank Indonesia, Annual Report 1997/1998, (Jakarta: Bank Indonesia, June 1998), pages 2-3.
[2] Widigdo Sukarman, “Banking and Real Sector Restructuring Effort,” Business & Economy Politic Quarterly Review of Indonesian Economy, (Vol. 3, No. 1, January 1999), page 21.
[3] According to Mochtar Riady, the decision to liquidate the aforementioned banks was a hasty action taken without considering the dramatic impact (panic) on the banking system. This indicated IMF’s lack of understanding of the map of Indonesian banking problems. The reasons submitted by Mochtar Riady included the fact that the Indonesian banking industry could be classified into three bank group at that time, namely: First, banks having problems prior to the monetary crisis in August 1997 with the characteristics that credit extension was centralized at bank owner or group companies thus violating BMPK, credit extension was centralized at several customers of big companies, public funds in foreign currency exceeded 30% of total banks fund, actively involved in foreign currency derivative transactions with a loan to deposit ratio above 120%, and mismatch regarding loan repayment period, accumulated bad debts creating solvability problem, and fictitious capital deposit for pursuing banks growth (size). Second, banks having problems following the monetary crisis. Third, banks surviving and continuing to operate normally despite the various problems. See, Mochtar Riady, Seeking Opportunity in the Middle of Crisis, (Jakarta: Universitas Pelita Harapan, 1999), page 141-142. The business permits of the aforementioned 16 banks were revoked by the Decree of the Minister of Finance No. 524-539/KMK.017/1997 dated November 1, 1997.
[4] Carl-Johan Lindgren (a), et.al., Financial Sector Crisis and Restructuring Lesson from Asia, (Washington DC: International Monetary Fund, 2000), page 59.
[5] Bank Indonesia, “Bank Indonesia Liquidity Assistance,” can be accessed at www://bi.go.id
[6] Charles Enoch, et.al. “Indonesia: Anatomy of a Banking Crisis Two Years of Living Dangerously 1997-99,” llviF Working Paper, WP/01/52 (Washington DC: International Monetary Fiifld, Vlay 26dl), page 13-14.
[7] See Letter of Intent (LOI) and Memorandum of Economic and Financial Policies (MEFP) of January 15, 1998.
[8] Bank Indonesia Liquidity Credit (KLBI) is a term used to describe various liquidity credit schemes of BI in order to support government programs, such as KUD credit scheme, Credit for Farmers, Cooperatives Credit, and others.
[9] J. Soedradjad Djiwandono, Managing Bank Indonesia During the Crisis Period, (Jakarta: LP3ES, August 2001), page 250.
[10] Sukowaluyo Mintohardjo, BLBI Simalakama Risk Authorities of President Soeharto, (Jakarta: RESI Publisher, 2001), page 126.
[11] J. Soedradjad Djiwandono, Op.cit, 218.
[12] Based on 34 Law No. 23 of 1999 concerning Bank Indonesia as amended by Law No. 3 of 2004, the supervision of banks is to be transferred from Bank Indonesia to the supervisory board of the financial sector by no later than December 31, 2010.
[13] Article 45 Law No. 23 of 1999 concerning Bank Indonesia stipulates: Governor, Senior Deputy Governor, Deputy Governor, and or officials of Bank Indonesia cannot be sentenced due to their decision or policy which are in compliance with their duties and authorities as set forth in this Law, insofar as conducted in good faith.
[14] FDIC, “A Study of the Desirability and Feasibility of a Risk-Based Deposit Insurance Premium System A Report pursuant to Section 220 (b)(l) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989,” submitted to the United States Congress by the FDIC, (December 1990), page 5.
[15] R. Mark Williamson, “Regulatory Theory and Deposit Insurance Reform,” Clavelend State Law Review, (1994), page 114.
[16] FDIC, Deposit Insurance For The Nineties: Meeting the Challenge (Draft), A Staff Study, (Washington DC, 1989), page 78.
[17] Ibid, page 35.
[18] R. Mark Williamson, Op.cit, page 358.
[19] Bank Indonesia, Directorate of Development and Regulation, “An Approach to Risk-Based Banks Supervision” (Draft), without month and year.