Sunday, June 03, 2012

INDONESIA - BANKING - Fitch: Indonesia Foreign Bank Ownership Double-Edged Sword

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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