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. ●
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