Banking Collapse and Restructuring in Indonesia, 1997-2001

By Fane, George; McLeod, Ross H. | The Cato Journal, Fall 2002 | Go to article overview

Banking Collapse and Restructuring in Indonesia, 1997-2001


Fane, George, McLeod, Ross H., The Cato Journal


Indonesia's banking sector was devastated by the crisis that began in October 1997. Of the largest banks--the seven original state banks and the ten largest formerly private banks--none managed to remain solvent, and those that still operate under their original names do so only because they were bailed out by the government. (1) The number of private banks was halved from 157 to 79:65 were closed, 9 merged, and 4 nationalized (Table 1). Most of the assets of the banking sector are now controlled by the Indonesian Bank Restructuring Agency (IBRA), which was set up to manage nationalized banks as well as the assets that the government acquired when it took over the liabilities of insolvent banks as a result of a blanket guarantee to bank creditors issued in early 1998.

The net cost to the government of bailing out depositors will probably be at least 40 percent of annual GDP. The exact amount will depend on IBRA's ability to collect doubtful debts and sell off its huge share portfolio. In order to amortize this cost over several years the government has issued a large volume of bonds, the value of which exceeds the total liabilities of the whole banking system at the time the guarantee was issued. Despite the resources that have been poured into the banking sector, however, its weakness continued to impede economic recovery as of mid-2001.

The 1997-98 Banking Crisis

The massive real depreciation of the rupiah in 1997-98, combined with the sharp rise in interest rates and the refusal of creditors to roll-over loans, led to the insolvency of many Indonesian businesses and banks. (2) At the beginning of November 1997, the Indonesian government entered into its first crisis support agreement with the IMF and simultaneously closed 16 small private banks that were experiencing liquidity problems and were seriously in breach of various prudential regulations. This exacerbated the public's loss of confidence in the banking system because, in the absence of clearly stated criteria for closures and of information on the soundness of the remaining banks, there was great uncertainty about which banks might be closed next. At the time, the government guaranteed deposits in the closed banks only up to an amount of Rp20 million--then equivalent to about $6,000.

Several of the remaining private banks continued to experience liquidity problems in the last quarter of 1997, and Bank Indonesia (BI, the central bank) supplied them with large amounts of last resort loans. Late in January 1998 the government tried to restore confidence by issuing a blanket guarantee of all deposits and other liabilities (except equity and subordinated debt) at domestically incorporated banks. Although the government initially intended to terminate this guarantee at the end of January 2000, it now seems unlikely to do so before setting up a self-funded compulsory deposit insurance scheme, which is not expected to be introduced until 2004.

In January 1998, IBRA was set up to perform three main roles. One is to oversee the restructuring or liquidation of weak banks so as to limit the fiscal costs of the government's blanket guarantee. Its second role is that of a large state-owned banking conglomerate. It acquired this role because it had to take responsibility for the troubled private banks that the authorities took over but did not close down. IBRA's third role is that of an asset management company. It was given the task of managing the very low quality (category 5) loans that, as described later, the government stripped from all banks that were recapitalized. It also acquired the assets of the banks that were closed down, many of which were low-quality loans. Lastly, it has acquired large, and often controlling, parcels of shares in some of Indonesia's best known companies. This happened in two ways. First, in the banking panics of 1997-98 BI refused to provide emergency liquidity support unless bank owners deposited shares as collateral, or issued personal or corporate guarantees that their banks would repay. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Banking Collapse and Restructuring in Indonesia, 1997-2001
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.