Crisis guidelines issued

The government has issued a new ruling giving the government and central bank a stronger legal basis to handle market crises, including decisions on whether to bail out troubled banks, the finance minister said on Thursday, Reuters reported.
“The new ruling is expected to give a stronger legal basis for decision-makers and give clear guidelines to every party involved in handling a crisis," Finance Minister Sri Mulyani Indrawati told a news conference.
The regulation in lieu of law to set up a financial system safety net (JPSK) complementing two
earlier regulations on the deposit insurance agency (LPS) and the central bank, to help protect the financial system from possible crises, according to The Jakarta Post.

The regulation will allow the government and the central bank to inject liquidity and give incentives to both banks and non-bank financial institutions, said Indrawati.

"Before this, we had no legal foundation to work from if our financial system was under pressure and in crisis," she said.
There are three criteria, Indrawati said, that could indicate a problem in the financial system: a shortage of bank liquidity; a potential insolvency problem in the banks; and signs of liquidity and/or solvency problems in non-bank financial institutions.

A systemic impact is defined as a condition caused by problems with banks or non-bank financial institutions such that these problems must be managed in order to retain confidence in the
financial system and the national economy.
To avoid misuse of funds, as happened with Bank Indonesia liquidity assistance (BLBI) in the late 1990s crisis, BI can take over the authority of shareholders' meetings to change bank officials and can place banks under special supervision.
If regulators cannot handle problems, a Financial System Stability Committee (KSSK), comprising the finance minister and central bank officials will be able to provide loan facilities or temporary capital injection to failing institutions, or to switch their management or even shut them completely, Indrawati said.
Such decisions by the KSSK will need parliamentary approval, she said.
"If the solution by the private sector leads to less burden in terms of costs and economic risk, the government and Bank Indonesia could offer incentives and provide facilities for the process," Indrawati said.
Emergency funding to failing banks or other institutions may be sourced from special non-tradable government bonds or directly from the state budget, the minister said.
Some analysts had feared that the authorities would be reluctant to tackle a crisis with unpopular policies this time around because of the risk they could subsequently face prosecution and jail due to regulatory uncertainty.
Indonesia has responded to the global financial crisis with measures ranging from greater protection for bank deposits to efforts to improve liquidity and avoid a credit crunch.
Earlier, the government raised guaranteed bank deposits twenty-fold to Rp2 billion ($202,800) from Rp100 million ($10,300) and maximum rupiah guaranteed deposit rates by 75 basis points to 10%.
Firdaus Djaelani, the head of the state-owned Deposit Insurance Corporation (LPS), also said on Tuesday that the agency had kept its guaranteed dollar deposit rates unchanged at 3.5%. Both rates are effective October 14.