www.theindonesiatoday.com - Fresh banking capital will be needed to support the ongoing growth of the Indonesian economy, Fitch Ratings says.
The challenge in broad terms for the local regulator is to oversee
the management of the financial system's risks in such a way that it is
able to attract new capital to support this growth, while ensuring the
accumulation of risk does not ultimately undermine the stability of the
overall financial system.
The debate around Indonesian ownership rules is receiving increased attention due to the offer by SINGAPORE's DBS to acquire Bank Danamon. The regulator is widely expected to clarify its position soon. (source)
The attractiveness of Indonesia's growth potential is leading to
greater foreign investor interest. The banking system could be nearly 2x
its current size when measured against GDP. Foreign ownership can bring
in capital and reduce the contingent liability on the sovereign.
However, the global banking crisis has shown that it can be a
double-edged sword.
The lessons learned in eastern Europe are that a balanced ownership
structure between domestic and foreign owners could contain the system's
sensitivity to parent banks. In eastern Europe western European parents
of local banks provided significant amounts of capital and funding
before the crisis.
But when problems arose the parent banks chose retrenchment over
cutting their domestic balance sheets. If the eurozone crisis worsens,
parent banks are likely to further reduce their funding. This could
force local banks to cut their lending and shrink balance sheets
further, with adverse effects on local growth.
For the sovereign, foreign bank ownership helps reduce potential
contingent liability regarding the banking system, and raises the level
of sophistication in the system via products, systems and risk
management processes.
Limiting the actual size of an investment holding can be
counterproductive as it reduces the incentive for shareholders to put in
new capital during difficult times. This ultimately means the sovereign
would be more likely to be required to step in.
Regulators do have the ability to manage the links between the local
and international financial system beyond ownership caps. Examples
include requiring certain systemically important banks that represent
the pillars of the financial system to remain under local control and to
regulate international funding reliance so that banks or the financial
system as a whole do not become over-reliant on more volatile funding
sources. (Indonesia Today)
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