World Banking Crisis, Should Indonesia Be Alert?

World’s Top Banks Collapse

The global banking industry is experiencing unprecedented challenges as a result of the current economic uncertainty and the threat of a global recession. A number of major banks across the globe, from the United States to Europe, are experiencing an extraordinary crisis, which is allegedly caused by the significant amount of withdrawal made by start-up business, post-Covid-19 economic situations, rising prices of goods and services as a result of geopolitical situations between Russia and Ukraine, and the Federal Reserve’s (The Fed) aggressively raised interest rate over the past year to quell inflation that has eroded the value of bank assets such as Government bonds and mortgage-backed securities.

There are at least five major world banks hit by a crisis, including the following:

Credit Suisse
Credit Suisse’s shares lost more than a quarter of their value in early March. Not only that, disruption also occurred to the shares of this bank after Saudi National Bank (SNB) as the majority shareholder stated that they would no longer be injecting funds into Credit Suisse. Reportedly at this time, UBS Group has decided to make an emergency acquisition of Credit Suisse Group, but apparently this has a negative impact on the most risky bondholders because the acquisition will erase the value of Credit Suisse’s “additional tier one” (“AT1”) bonds. Swiss financial regulator Finma said that AT1 bonds worth 16 billion Swiss francs or the equivalent of US$17.3 billion (Rp 265.55 trillion) would be fully written off. Previously, Credit Suisse Bank had also been notified by Finma that the bonds would be written off to a zero value.
Silicon Valley Bank
Silicon Valley Bank officially collapsed in early March 2023 after a California-based commercial banking company experienced a capital crisis and went bankrupt. Most of SVB’s customers are start-up companies where when the Covid-19 pandemic hit, these start-up companies made deposits at SVB, which were then converted into money by SVB and used as investment funds elsewhere through a purchase scheme of government bonds (US).However, when the Fed raised interest rates, SVB’s customers simultaneously withdrew their funds in SVB which resulted in SVB no longer having liquidation funds. Until March 9, 2023, the withdrawal of funds from this bank exceeded US$ 42 billion or IDR 648.69 trillion. Other SVB customers were also worried about their funds as a result of this incident so that a bank run occurred, namely a condition where many customers simultaneously withdraw funds in large quantities and as soon as possible from a bank because the customers do not believe that the bank is capable of paying the deposited funds in full amount and on time.

SVB finally sought an injection of funds because they did not have sufficient liquid assets to meet the high demand for funds by their customers. However, the injection of funds never came, so SVB was compelled to sell its bond holdings worth US$ 21 billion or the equivalent of Rp. 324.5 trillion, of which some of the bonds they owned were the US Government bonds. However, unfortunately, the sales of these bonds actually caused the bank to suffer losses of up to US$ 1.8 billion or the equivalent of Rp. 27.8 trillion because the value of the bonds at that time was dropping drastically.
Signature Bank
Signature Bank is a New York-based bank that has been operating since 2001, but was officially closed by the Bank Regulator and the US Treasury only two days after the collapse of Silicon Valley Bank. Essentially, Signature Bank’s failure was nothing but the result of a wave of panic over the previous bankruptcy of Silicon Valley Bank.It is known that the concerns of customers, the majority of whom are startup companies, is related to Signature Bank’s increased exposure to crypto after SVB went bankrupt. The US deposit insurance agency, the FDIC, has conveyed it has set up a new entity, Signature Bridge Bank, which will open as normal under regulatory control. Customers will then be able to access all their funds, and checks will be cleared.
Silvergate Bank
Silvergate is one of the two main banks for crypto companies, along with New York-based Signature Bank. The bank was forced to sell its assets at a loss to cover the massive withdrawals by panicked customers, and in the end the bank announced that it was ceasing operations and liquidating the bank. Shares in the company fell more than 36 percent in post-stock trading.
First Republic BankFirst Republic Bank is one of the banks that is experiencing great pressure amid fears of the collapse of the three banks i.e., Silvergate Bank, Silicon Valley Bank and Signature Bank, which is because the First Republic Bank’s share price was eroded by 52 percent so that in the end 11 banks agreed to deposit funds worth US$ 30 billion or Rp. 462 trillion Rupiah to First Republic Bank to prevent the bank from going bankrupt.

Market Mechanism Failure?

There are two views regarding the market mechanism of the banking industry. First, the view of those who believe that capitalism and free market mechanisms are the roots of the current banking crisis problem. They contend that the free market economic system has an impact on the creation of various financial derivative products, including their dissemination through investment traffic and globally accessible portfolios which are almost free from obstacles. Thus, they contend that in this situation, capital restrictions are necessary to limit capital, and the structure of the international economy needs to be revised while giving priority to the state’s role as an economic stabilizer and regulator.

Second, the view of those who believe that the market economy cannot be blamed for the current banking crisis. They have the notion that the financial crisis in the banking industry occurred as a result of various factors such as 1) policies related to deficits in the balance of payments, 2) overconsumption in the behavior of housing consumers in America, 3) overvaluation of property assets, and 4) improper application of risk management for various financial derivative products.

War propaganda by the US Government is considered to worsen the situation because it is alleged that it costs around US$ 3 trillion, making the current financial crisis in the banking sector a time bomb that could explode at any time. Thus, the crisis that occurred is not because of the failure of the market mechanism but rather as a transitional condition where the market is making corrections to the 4 fundamental factors previously mentioned. They contend that the Government does not need to take actions that significantly intervene the situation because any actions will be deemed an intervention and will actually slow down the process of moving towards a new equilibrium.

However, basically, regardless of whether this is the result of a market economy failure or a market corrective mechanism, the government as the regulator should not remain silent in the midst of a crisis to mitigate the impact.

Should Indonesia Banks be on alert?

The banking crisis in the United States that caused several of the world’s major banks to collapse may indirectly create a domino effect on the global economy, including Indonesia. President Joko Widodo has warned to raise awareness of the negative banking conditions in the United States. The impact that is feared to occur in developing countries including Indonesia is in the form of an overflow of negative impacts that will affect a region’s or country’s macroeconomic via cross-capital, liquidity, and exchange rates. The exchange rate (rupiah) even weakened 30 points or 0.19 percent to the position of Rp. 15,183 per US dollar as a result of market concerns over the expansion of the world banking crisis. Deputy Governor of Bank Indonesia (“BI”) Dody Budi Waluyo believes that the potential impact of bankruptcies in the US’s banking sector will be felt in the startup or e-commerce sector, including startup companies that do not even have a direct relationship with banks that have collapsed or are any bank in the world. This is because the customers of those collapsing banks were venture capitalists who provided funding for start-up companies.

On the other hand, the Financial Services Authority (“OJK”) ensures that the US’s banking crisis phenomenon will not have a direct or significant impact on the Indonesian banking industry because Indonesia currently does not have any business relationships, facility lines or investment in securitization products from Silicon Valley Bank. In addition, unlike other foreign banks, particularly those in the United States, banks in Indonesia do not provide credit and investment to startup or crypto companies. Dian Ediana Rae, OJK’s Chief Executive for Banking Supervision, stated that Indonesia, after the 1998 financial crisis, had taken fundamental steps to strengthen institutions, infrastructure and governance as well as customer protection so that the Indonesian banking system became strong, resilient and stable. This is reflected in Indonesia’s stable banking performance in Indonesia and positive growth despite domestic and global economic pressures.

Indonesian banks are currently showing very good liquidity. Banking assets are also maintained in proportion to the composition of Third Party Funds (“DPK”), which is dominated by the increasing current accounts and saving accounts (“CASA”) or low-cost funds so that banking assets are not sensitive to interest rate movements. There are currently no commercial banks in Indonesia that are included in the category of Banks in Resolution, namely banks that cannot be restored and are experiencing financial difficulties that could endanger their business continuity.

Steps to Anticipate a Crisis

According to the Ministry of Finance, Indonesia by far has been able to properly control issues related to finance and policies in the real sector. Good and precise coordination between the Ministry of Finance, Bank Indonesia, OJK, and the Deposit Insurance Corporation (“LPS”) is proof that Indonesia has a number of experiences that help deal with potential global crises due to the collapse of several large banks in the world. With quite intense coordination from the four authorities mentioned earlier, as well as crisis and pandemic experiences, Muhammad Edhie, Chair of the Bank Indonesia Supervision Agency believes that Indonesia can mitigate the potential risks of the current collapse of the world’s large banks. In addition, policies related to the Crisis Management Protocol (“PMK”) have been regulated in Law Number 9 of 2016 concerning Prevention and Management of Financial System Crisis. Based on this regulation, the mandate for preventing and handling financial system crises is held by the Financial System Stability Committee (“KSSK”).

KSSK is a forum for coordination, cooperation, and exchange of information between authorities in the framework of monitoring and maintaining financial system stability, handling financial system crises, and handling systemic bank problems in normal financial system conditions and financial system crises.

To avoid a financial crisis in the banking industry, the OJK, in collaboration with Bank Indonesia, establishes a list of systemic banks that is updated every six (6) months. A systemic bank is a bank that has a significant amount of assets and has a variety of product complexities with financial conglomerates. Systemic banks also have links with other banks, where the bank’s position cannot be replaced in the event of failure or closure. Basically the failure of a bank can have a systemic or non-systemic impact. Systemic impact can be interpreted as when a bank has a financial problem, then the problem causes disruption and even failure in the financial services sector or even other banks. OJK determines at least three criteria for a systemic bank, based on:

Bank Scale Size
Banks classified as systemic are those with a large scale of business and fall into the categories of BUKU 4 and BUKU 3. In these two BUKU categories, banks have a diverse range of business activities in terms of products, services and equity participation in other financial institutions on an international scale, as well as total assets and total deposits held by the related bank.
Interconnectivity
This systemic bank not only carries out business activities in the form of raising and distributing funds, but it also establishes cooperation with other agencies, other banks, and other financial institutions.
Product and Transaction Complexity
Banks classified as systemic banks have more diverse and complex products and services with a wider range, including but not limited to savings, current accounts and credit, but also a variety of other more complex products, such as banknotes, deposits and others. These products and services require close monitoring and management to ensure that there are no errors or problems that jeopardize the survival of the bank and other financial institutions as a whole.

On top of that, if a bank experiences liquidity difficulties, the bank may apply for a Short Term Liquidity Loan (Pinjaman Likuiditas Jangka Pendek or PLJP) to BI. In granting PLJP, the Financial Services Authority evaluates compliance with solvency requirements and bank soundness level. Then, BI and OJK conduct an assessment regarding the fulfillment of collateral requirements and an estimate of the bank’s ability to return the PLJP.

In conclusion, through this banking crisis, the government of Indonesia and business actors in the banking and financial sectors are expected to learn the lessons in order to mitigate risks from the possibility of a banking liquidity crisis in Indonesia. Thus, the banking industry in Indonesia will remain stable and healthy in the future as a vehicle to continue advancing the Indonesian economy.

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