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Century's 'systemic threat' justification crumbles
Jakarta Post - March 6, 2014
A Corruption Eradication Commission (KPK) document on the indictment of former Bank Indonesia (BI) deputy governor Budi Mulya, a copy of which was recently obtained by The Jakarta Post, indicates how then finance minister Sri Mulyani regretted the decision to bail out the bank.
During a meeting of the Financial System Stability Committee (KSSK) on Feb. 3, 2009, or three months after the bailout decision, Mulyani asked the attendees whether the decision to categorize the bank as one with a systemic threat could be reviewed.
The question was raised after the LPS reported that the bailout had topped Rp 6.1 trillion (US$526.7 million) from the initial estimate of Rp 632 billion.
Former KSSK secretary Raden Pardede told her that there was no provision for such a request, while then BI governor Boediono, now the vice president, apparently told her that the meeting should focus more on how to save Century as the decision to bail it out had been agreed upon.
KSSK is a joint forum for the Finance Ministry, BI and other related agencies to work on preventive measures against a financial crisis.
Mulyani's regret was not her first concerning the matter. Based on the document, she previously voiced disappointment over the bailout during a KSSK meeting on Nov. 24, or three days after the bailout decision on Nov. 21.
Mulyani, currently a top executive at the World Bank, questioned BI's professional judgment and supervision capacity as Century's capital adequacy ration (CAR) had plunged to minus 35.9 percent, and that more bailout funds were apparently needed. Boediono told Mulyani that she had already made her decision, and it would be a mistake to rescind it.
"I expressed my disappointment at BI when they told us that the bank's CAR was just minus 3.5 percent and it would only need Rp 632 billion," said Mulyani, according to a document on her questioning.
"When the KSSK made the decision to categorize the bank as one that posed a systemic threat, the data that we received to support it should have been based on fact."
"I was concerned that the data supplied by BI for the KSSK during the Nov. 20 and 21 meeting was incorrect," she said during her questioning on May 1, 2013.
When asked by the KPK whether invalid BI data had caused the ballooning bailout cost, Mulyani briefly said: "Yes, that would have surely [affected the cost]."
The decision to bail out Bank Century was based on BI's conclusion that if the bank was not salvaged, its insolvency could trigger a systemic collapse in the banking sector.
A collapse would have caused panic and led to a run on banks, such as during the 1998 financial crisis. But according to the KPK indictment document, such a conclusion was unfounded.
A day before the bailout decision, then BI director of the banking research and regulation directorate (DPNP) Halim Alamsyah, now BI deputy governor, presented an assessment stating that Bank Century did not pose a systemic risk.
The BI board of governors, however, disregarded Halim's assessment and decided not to present it at the upcoming KSSK meeting to decide on whether to bail out Century.
According to the document, the board was concerned that the assessment would hamper its effort to get the KSSK to agree to the bailout. The board insisted that Century posed a systemic risk, and requested BI's banking supervision directorate one to word its analysis to support its stance, according to the document.
During the KSSK meeting on Nov. 20, then Deposit Insurance Corporation (LPS) chief commissioner Rudjito along with chairman of the Capital Market Supervisory Agency (Bapepam) Fuad Rahmany, then Fiscal Policy Agency chief Anggito Abimanyu and Bank Mandiri president director Agus Martowardojo tried to convince the meeting attendees that a bailout was unnecessary as the bank did not in any way pose a systemic threat.
According to the document, during questioning on Nov. 26, 2013, Boediono said the decision to categorize the bank a systemic risk was based on "brainstorming" during the KSSK meeting.
"The decision was made in all sincerity and we finally decided that a systemic threat posed a greater risk than shutting down the bank. That's why we decided to avoid such a risk," said Boediono, who had served as BI governor for less than six months prior to the bailout.
The Supreme Audit Agency (BPK) announced late last year that the state had lost more than Rp 7 trillion in the bailout, Rp 6.7 trillion of which was in the form of a direct bailout while an additional Rp 689 billion was in form of BI short-term assistance (FPJP).
The first court hearing on the Century case is slated to be held on Thursday, with Budi Mulya as the first defendant.
According to the indictment document, the alleged crime was committed "collectively" by Boediono, then BI senior deputy governor Miranda Goeltom and then BI deputy governors Siti C. Fadjrijah, Budi Rochadi, Muliaman Hadad, Hartadi Sarwono and Ardhayadi Mitroatmodjo.
The KPK deemed that there were sinister motives at play in trying to keep the bank afloat through the bailout. The KPK alleges that Budi accepted Rp 1 billion from Century shareholder Robert Tantular in August 2008, about four months before the bailout decision.
BI foundation YKK [Employees Welfare Foundation - JB] had Rp 83 billion deposited in Bank Century. If the bank had collapsed, YKK would have lost all its money as the government's guarantee program only covered deposits of less than Rp 2 billion. The interest of the members of board of governors in YKK was evident as they had received mortgages under the Baperum Multi Griya plan.
According to the KPK document, there was also a need to rescue Rp 2 trillion deposited by businessman Boedi Sampoerna.
The snowball effect
KPK indictment on the state losses in the channeling of short-term assistance (FPJP) worth Rp 689 billion (US$59.5 million).
Aug. 11, 2008: Bank Century shareholder Robert Tantular allegedly gives Bank Indonesia (BI) deputy governor Budi Mulya a check worth Rp 1 billion at his office in BI headquarters in Jakarta.
Oct. 29: Due to financial problems, Bank Century requests liquidity assistance worth Rp 1 trillion from BI.
Oct. 30: BI official Zaenal Arifin from the banking supervision directorate one declines the request, saying the bank cannot meet the necessary requirements to receive such a facility. After hearing the rejection, BI senior deputy governor Miranda Goeltom summons Zaenal and colleague Heru Kristiyana, and questions their judgment.
Oct. 31: Deputy governor Siti C. Fadjrijah sends a memo to Zaenal saying: "In line with the message from BI governor [Boediono], Bank Century is required to be assisted and there should be no banks left to fail during this time as it will exacerbate the condition of our banking sector and the economy."
Nov. 6: The bank is under special surveillance from BI as its financial health deteriorates.
Nov. 13: The first meeting of the Financial System Stability Committee (KSSK), a joint forum between the Finance Ministry, BI, Deposit Insurance Corporation (LPS) and other related institutions. After the meeting, BI board of governors requests that BI's banking research and regulation directorate (DPNP) prepare an analysis that should lead to the conclusion that Bank Century will pose a systemic threat to the banking sector if left insolvent.
Nov. 14: BI issues a regulation that eases barriers and requirements for Bank Century to receive the FPJP.
However, the bank still cannot meet the requirements, as it cannot provide legitimate documents on its assets and its capital adequacy ratio (CAR) is negative. To obtain the FPJP, the bank's CAR is required to be within positive territory. Budi and others then allegedly use the bank's CAR statement from Sept. 30, which is positive, instead of an updated version that is negative. The bank's collateral is also below the 150 percent FPJP ceiling. The channeling of the FPJP is also made before the end of the day's clearing (in order for the bank's books to look good). BI's internal supervision directorate finds violations in the channeling of the facility after it verifies the process.
KPK indictment on categorizing Century as a bank worthy of being classified as a failed bank with a systemic risk. This is the justification to approve the bank's bailout that eventually swells more than tenfold from Rp 630 billion to Rp 6.76 trillion.
Nov. 16: The board of governors meets with finance minister Sri Mulyani and executives from the LPS. LPS estimates it could cost as much as Rp 15 trillion and as little as Rp 1.2 trillion to salvage Century. LPS believes it will be cheaper to shut down Century, at only Rp 195 billion. Boediono tells LPS that it underestimates the cost as its calculations are based entirely on the micro side.
Nov. 19: In a meeting of the KSSK, Halim Alamsyah of BI's DPNP presents his team's assessment on whether Century will pose a systemic threat. He fails to finish his presentation, and the KSSK does not reach a decision.
Nov. 20: The board of governors convenes at 11 a.m. The meeting requests that the DPNP provide an assessment that supports the justification of determining Century worthy of being categorized as a failed bank with a systemic risk. At 8 p.m., the board receives information that the bank's CAR turns negative. Deputy governors Budi Rochadi and Siti discuss concerns over funds owned by BI's Employee Welfare Foundation (YKK-BI) that are deposited in the bank and will be wiped out should the bank not be salvaged. Halim of the DPNP then presents findings with a conclusion the bank will not pose a systemic threat. The board annuls Halim's conclusions and decides not to have them presented in the upcoming KSSK meeting about determining a bailout plan. The board is concerned that the conclusion will hamper its efforts to get the KSSK to agree on bailing out the bank. The board insists that the bank will pose a systemic risk, and requests that the banking supervision directorate 1 condition its analysis to support the board's stance.
The directorate submits its proposal to the KSSK, citing that the bailout will cost Rp 1.77 trillion. But, prior to the KSSK meeting that day, KSSK secretary Raden Pardede tells Pahla Santoso of the directorate to lower the cost to Rp 632 billion in order for it to be approved by the finance minister. If the cost is huge, there is a possibility that the bailout option will be rejected.
LPS chief commissioner Rudjito, along with Capital Market Supervisory Agency (Bapepam) chairman Fuad Rahmany, Fiscal Agency chief Anggito Abimanyu and Bank Mandiri president director Agus Martowardojo, tells the KSSK audience that bailout is unnecessary as the bank will not pose a systemic threat if shut.
Nov. 21: At 4:30 a.m. Mulyani and BI governor Boediono, accompanied only by Raden and legal consultant Arief Surjowidjojo, meet in a separate room to reach a decision. At 5:30 a.m. they announce to the KSSK audience that Bank Century will pose a systemic threat, and request that the LPS take over the bank.
Nov. 24: During a KSSK meeting, Mulyani questions BI's professional judgment and supervision as the bank's CAR plunges to minus 35.9 percent, and says that a bigger bailout is needed. Boediono tells Mulyani that the government has already made the decision on the bailout and it will be a blunder if it changes its policy. Feb. 3, 2009: During a KSSK meeting, the LPS reports that the bailout for Century has already topped Rp 6.1 trillion in order to keep Century's CAR above 10 percent. Upon receiving the report, Mulyani asks the KSSK audience whether the decision to categorize the bank as having a systemic threat can be reviewed. Raden says such a request is not yet regulated. Boediono tells the audience that the meeting should focus more on how to save Century, as decided in the previous KSSK meeting.
[Source: KPK's indictment document against Budi Mulya.]
Source: http://www.thejakartapost.com/news/2014/03/06/century-s-systemic-threat-justification-crumbles.html.
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