Minggu, 07 April 2013

Does Indonesia need big banks?


Does Indonesia need big banks?
Harry Pattikawa ;  A Credit Risk Portfolio Analyst at DHB Bank in Rotterdam
JAKARTA POST, 30 Maret 2013

  
According to the National Banks Association (Perbanas), the formation of large banks is necessary to uphold the dignity of the nation. Therefore, the government needs, among other things, to merge Bank Mandiri and Bank Negara Indonesia in order to create the largest bank in Southeast Asia. 

This would increase the competitiveness of the national banking industry on an international level. Hence, the larger banks would be able to expand their activities more easily overseas or even take a dominant position in the region.

On Feb. 26, Perbanas asked the Commission XI of the House of Representatives (DPR) that is overseeing monetary and finance operations to smooth this aspiration.

Perbanas’ aspiration is in line with the rules for multiple licensing regulations issued by Bank Indonesia, in which banks are categorized based on their core capital. Banks that are in the largest category with capital of more than Rp 30 trillion (US$3.1 billion) are not restricted in the performance of their activities and may compete at an international level. 

On the other hand, the regulation will make it difficult for small banks to grow without raising capital. Consequently, only the big banks will be free to spread their wings. 

There are four reasons why the DPR should not satisfy Perbanas’ aspiration.

First, the bigger the banks become, the higher the bailout the government will pay when they fail. Elsewhere, some high caliber bankers have the inspiration to go in the opposite direction. 

They promote breaking up the big banks. The aspiration of these bankers is inspired by the substantial problems in the US banking industry that caused the financial crisis of 2008. For instance, the former head of the biggest bank Citigroup, Sandy Weill — a legend of Wall Street — said that small banks do not have the potential risk to harm tax money and for that reason big banks need to be split up. 

Weill and another ex-Citigroup boss, John Reed, also argue that big financial institutions could be more rewarding and safer if they were broken up. Other bankers who share this position are David Komansky, former CEO of Merrill Lynch and ex Morgan Stanley’s CEO Philip Purcell. 

The same inspiration is also found among some academics. Nobel Prize winners in economics, such as Joseph Stiglitz and Ed Prescott, believe that the economy cannot recover from the financial crisis if big banks are not broken up. Moreover, empirical research published in 2012 by the World Bank states that it is doubtful whether big banks are needed. The research finds that systemically large banks are subject to greater market discipline as evidenced by a higher sensitivity of their funding costs to risk proxies, suggesting that big banks are often too big to save. 

It should be underlined that the International Monetary Fund (IMF) also argues that the financial regulators should consider breaking up big banks in order make the global economy safer.

Second, if there are only a few large banks in the market then it can sustain a creation of a cartel for the costs of customers. Banks will be discouraged to compete. As a result, services are not improved optimally, loan interest remains high and the deposit rate is kept low.

Third, big banks have a stronger position to lobby governments in an attempt to ease or drown banking rules. Quoted from Reuters, big banks are very aggressive lobbying against restrictions that they believe are too hard. As a result, the banking regulatory standard can become weak and fragile. The National Bureau of Economic Research found that the more aggressively banks lobbied before the financial crisis, the worse their loans performed during the economic downturn and the more bailout dollars they received.

Fourth, overseas expansion ambition needs to be questioned and whether Indonesian banks have the competitive advantages to compete abroad. When the activities abroad fail, then the domestic funds will bear the cost. 

As a final word, the banking sector is vital but not more special than other sectors. In the US prior to the 2008 crisis, the banking sector had long been proud and a highly prestigious industry. 

The banking sector was framed with excessive innovation that was more suitable for implementation in the real sectors instead. As a result of squeezing banks beyond their natural boundaries, a substantial supply of money exceeded the real economy and subsequently blew up the system. 

The function of the banking system is straightforward. It is a bridge between savings and investment. The innovative sectors and exports are precisely the areas that should be expanded in order to become superior in the region. These sectors will then create jobs in each supply chain. In this way, the dignity of the nation will be upgraded and banks will also benefit. 

Thus, the national honor in the context of Perbanas cannot be measured by the size of banks.

Based on these arguments, the House should have the courage to say no to Perbanas. 

Tidak ada komentar:

Posting Komentar