Bank Indonesia 7th Annual International Seminar. Large Complex Financial Institutions: Too Big to Manage? Too Big to Regulate?

Bank Indonesia – 7th Annual International Seminar Large Complex Financial Institutions: Too Big to Manage? Too Big to Regulate? STRICTLY PRIVATE AND...
Author: Dina Wade
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Bank Indonesia – 7th Annual International Seminar Large Complex Financial Institutions: Too Big to Manage? Too Big to Regulate?

STRICTLY PRIVATE AND CONFIDENTIAL

Topic: Are Large Financial Institutions Too Big to Manage and Regulate? There are examples of large well-managed financial institutions and of countries with success in regulating the financial industry

 Current financial context makes comparisons difficult – both big and small financial institutions affected

Management

 Institutions in the FDIC’s Failed Bank List (65 since Jan 2007) come in all shapes and sizes  Some large financial firms have been well managed through the crisis: JP Morgan, HSBC

 Historical Analysis - 2004 data shows little significant difference by Asset Size

Total Assets >US$100bn US$40bn to US$100bn US$20bn to US$40bn US$5bn to US$20bn US$1bn to US$5bn

# of US Institutions (public) 10 16 16 64 196

Efficiency Ratio (%) 57.70% 53.98% 53.77% 56.53% 57.60%

ROAA (%) 1.39% 1.31% 1.45% 1.29% 1.14%

Non-Interest Expense / Assets (%) 3.45% 2.95% 2.85% 2.35% 3.12%

- Given how close the numbers are – no clear statistical correlation between profitability and size

Source: ANL DataSource

 Observations of successful big firms  World-class management and controls  Effective use of technology to achieve scale while increasing convenience and maintaining service  Strong culture

 Governments’ responsibility: not regulate firms but the industries they compete in and products they sell Regulations

 Financial crisis was also the result of regulatory “misses”, which were wide in scope. Examples:  US Congress:  Banking: deregulation repealing banking provisions in Glass-Steagall  Mortgages: lowering minimum down-payments  CDS: Commodity Futures Modernization Act allowing trade of Credit-default swaps with limited oversight  Federal Reserve: in 2001, the Fed funds rate was reduced 11 times from 6.5% to 1.75%  HUD: require Fannie Mae to dedicate 50% of its business to “low- and moderate-income families” 2

STRICTLY PRIVATE AND CONFIDENTIAL

Indonesia Focus – Banking Sector Of the top 10 banks in Indonesia, 73% of assets are owned by state-owned entities

 Stability - ownership structure of large banks in Indonesia provide stability Name Bank Mandiri Tbk PT Bank Rakyat Indonesia Bank Central Asia Tbk PT Bank Negara Indonesia Persero Tbk PT Bank Danamon Indonesia Tbk PT Bank CIMB Niaga Tbk PT Bank Pan Indonesia Tbk PT Bank Internasional Indonesia Tbk PT Bank Permata Tbk PT Bank Mega Tbk PT

Total Assets (IDR bn) 358,438,700 246,076,900 245,569,900 201,741,100 107,268,400 103,197,600 64,391,920 56,855,130 54,059,520 34,860,870

Majority Owner State-owned State-owned Djarum Group State-owned Singapore Malaysia Panin Group Singapore Standard Chartered / Astra Group Para Group

Total Top 10

1,472,460,040

State-owned or Equivalent

1,073,577,830 73% of Top 10

Note: Total bank assets IDR2,311 trn

 Impact of 1997/1998 crisis – “conservative” regulations Indonesia Financial Sector Loans and Deposits Total Assets (Rp trn) CAR (%) Gross NPLs (%) NII (%) ROA (%)

2004 1,272 19.4% 5.8% 5.5% 3.5%

2006 1,694 20.5% 7.0% 6.9% 2.6%

2008 2,311 16.2% 3.8% 9.4% 2.3%

 Better coordination between government and Bank Indonesia (e.g. Bank Century case)  Continued tight regulatory oversight and policies

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STRICTLY PRIVATE AND CONFIDENTIAL

Indonesia Focus – Financial Sector Proportion in the Economy The banking sector still represents a small part of the Indonesian economy

 Financial sector in the economy - financial sector still represents a small part of the economy in Indonesia vs. industrialized countries Indonesia GDP By Sector 2,082

IDR bn

1,738

1,847

10% 13%

Other Transportation & Communication Mining Services Financial Services

9% Agriculture

Hospitality & Trade

Manufacturing

Source: Bank Indonesia

 Size of the economy has also likely limited the size of banks  Domestic Consumption driven GDP – natural diversification of risk

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STRICTLY PRIVATE AND CONFIDENTIAL

Indonesia Focus – Financial Supervision As Indonesia grows, financial supervision might change

 Internationalization - as Indonesia grows through increased FDI and focus on exports, the weight of the financial services sector in the economy will grow and naturally become more international

 Link to natural resources  Need for collaboration between government agencies, ministries and sectors

 Potential future changes in regulatory structure  Bapepam – LK  BI (independent)  New regulatory body: FSA (UK), MAS (Singapore)

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