Indonesia: Blanket Guarantee, 1998

Speculative pressure caused by the floating of the Thai baht forced the Indonesian government to abandon the peg of the Indonesian rupiah on August 14, 1997. On November 1, 1997, amid economic distress caused by the depreciation of the currency, the government closed 16 weak banks and compensated their depositors up to IDR 20 million per account (BI 1998; Enoch 2000). The lack of immediate full protection for large depositors and skepticism regarding the health of remaining banks undermined confidence, causing runs throughout the banking sector. The resulting drain on liquidity weakened international confidence in Indonesian banks, restricting their access to foreign credit (Sharma 2001).

On January 26, 1998, the government announced a blanket guarantee through presidential decree (Decree 26 1998, art. 6). The government announced the guarantee to restore confidence in the national currency and banking as soon as possible (Decree 26 1998, art. 1).

The lack of protection for large depositors triggered runs throughout the banking sector, draining banks’ liquidity and weakening international confidence in the Indonesian financial system (Sharma 2001). The government responded by announcing a blanket guarantee and creating IBRA on January 26, 1998. IBRA had three major responsibilities: administering the blanket guarantee, rehabilitating financial institutions that BI deemed unhealthy, and taking any other legal actions required to restructure unhealthy banks (Decree 26 1998; Decree 27 1998).

IBRA had a broad array of powers to intervene in struggling financial institutions. Its methods included closures, open bank interventions, full takeovers, and recapitalizations (Enoch 2000). Figure 1 lists the dates of IBRA actions, and the types of interventions taken.

The Indonesian government established the blanket guarantee through a presidential decree on January 26, 1998. A second presidential decree issued on the same day created IBRA and gave the newly created body the power to administer the blanket guarantee (Decree 26 1998; Decree 27 1998).

The government created IBRA to administer the blanket guarantee as well as oversee the rehabilitation of Indonesian banks. IBRA and BI jointly carried out the processing of guarantee payouts. Following the closure of IBRA on February 27, 2004, BI took over the administration of the blanket guarantee (AFX Asia 2004; Decree 27 1998; IBRA 1999).

There were some issues of blanket guarantee responsibility being passed between IBRA and BI. This resulted in a slowdown in payments on interbank claims (see Summary Evaluation) (Enoch et al. 2001).

The president of Indonesia appointed a chairman to lead IBRA. The minister of finance was responsible for choosing the rest of the leadership board (Decree 27 1998).

The Ministry of Finance oversaw the actions of IBRA leadership, and established implementation procedures and conditions in consultation with the BI governor. Lehman Brothers and JPMorgan also advised IBRA leadership (BI 1998; Decree 26 1998; Sharma 2001).

In a letter of intent sent to the IMF on October 31, 1997, the Indonesian government stated that it would guarantee deposits only up to IDR 20 million in 16 banks that were closed on November 1, 1997. The decision to attach full protection for larger depositors to the sale of bank assets, preventing immediate coverage, led to runs on domestic commercial banks (Gov’t of Indonesia 1997; Sharma 2001; WSJ 1997). The continued runs resulted in the government’s decision to announce a blanket guarantee, and create IBRA to administer the guarantee, on January 26, 1998 (Decree 26 1998, art. 5).

A key inconsistency between the decree issued by the minister of finance and the decree issued jointly by IBRA and BI caused otherwise eligible liabilities to be excluded due to their being registered late by debtors. The government and BI introduced a new joint decision to rectify the discrepancy (IBRA 1999).

The government originally prevented IBRA from publicizing its actions, leading to the public perception that the body was nonoperational. Before the successful April 1998 closings, the guarantee did not generate confidence in the public, and runs continued within the banking sector (Enoch et al. 2001).

The communication around the April 1998 closings and exercise of the blanket guarantee was effective in instilling confidence among depositors and creditors, ending bank runs. On April 3, 1998, and throughout the ensuing weekend, the finance minister and IBRA leadership held frequent televised press conferences explaining IBRA measures being taken and emphasizing that all depositors were fully protected (Enoch 2000).

According to the presidential decree, the government fully funded the operations of the IBRA (Decree 27 1998). The government took over banks’ losses through bond issuance, ensuring that depositors and creditors did not suffer losses. The government and IBRA issued a total of IDR 649 trillion (USD 65 billion)^FIn 1998, USD 1 = IDR 10,013.60, per FRED. in bonds for the entire crisis response (Frécaut 2004; IMF Staff 2003).

IBRA also used shareholder settlements with responsible bank shareholders to recover some of the costs of the blanket guarantee (IBRA 1999).

All locally incorporated commercial banks were eligible for protection from the blanket guarantee. Prior to official protection, the government required banks to sign agreements to adhere to a set of macroprudential regulations (See Key Design Decision No. 12, Other Restrictions) (Decree 26 1998; Enoch et al. 2001). 

The blanket guarantee covered all depositors and most creditors in eligible institutions, including derivative transactions. The guarantee did not include subordinated debt, related party claims, irregular or unverified liabilities, and liabilities that paid above-market interest rates. All liabilities were subject to a stringent verification process conducted by IBRA and BI. The blanket guarantee covered accounts denominated in both local and foreign currencies. IBRA created an exchange offer to extend the maturity claims of foreign creditors and reduce pressure on the state budget. As of June 2007, Indonesian banks’ total liabilities were USD 209 billion. Of these liabilities, USD 110 billion were rupiah deposits and USD 34 billion were deposits denominated in foreign currency (Decree 26 1998; Frécaut 2004; IBRA 1999).

In August 1998, BI announced its intention to limit coverage to solely depositors, removing creditors from blanket guarantee coverage. In 2000, IBRA paid interbank claims, which had been previously delayed due to the exclusion of related party claims (Dow Jones 1998; Enoch et al. 2001).

IBRA required protected institutions to pay a fee of 0.25% per annum of the total value of their guaranteed liabilities. IBRA required banks to pay the fee in advance semiannually (IBRA 1999).

The government and IBRA issued a joint decision requiring creditors or debtors to register eligible liabilities within 60 days of the joint decision or the booking of the liability. IBRA and BI jointly carried out claim processing. IBRA placed depositors’ funds in matching accounts at stable state banks. For accounts denominated in foreign currencies, IBRA provided guarantee payouts in rupiah at the market exchange rate on the day of the payment (Decree 26 1998; Enoch et al. 2001; IBRA 1999).

IBRA created a set of prudential regulations intended to prevent moral hazard. IBRA set a ceiling on the deposit rates banks were permitted to offer. This ceiling, announced weekly by BI, was 500 basis points above the rates offered by the banks that BI used to calculate the Jakarta Interbank Rupiah Rate (JIBOR), the Indonesian benchmark interest rate. In addition, BI placed restrictions on banks’ credit growth. IBRA required banks to sign agreements to adhere to these prudential restrictions before receiving coverage from the blanket guarantee (Enoch et al. 2001; Sharma 2001).

The announcement of the blanket guarantee established an expected end date of January 2000 (BI 1999, vi). The government did not enact limited deposit insurance legislation until 2004, when it created the Indonesian Deposit Insurance Corporation to administer a new limited protection scheme. The new law came into effect on September 22, 2005, officially ending the blanket guarantee. The new deposit insurance scheme wound down coverage gradually, eventually decreasing to IDR 100 million per account 18 months after becoming operational. The insured deposit amount could be adjusted in the event of runs, significant inflation, or if less than 90% of total depositors in a bank were not fully covered by the limited scheme. Accordingly, the IDIC rehabilitated systemically important banks rather than closing them, potentially creating a blanket guarantee for systemically important banks (Jakarta Post 2004; Kariastanto 2011; Law 24 2004; Mcleod 2006).