Protecting banks from failure: a comparative analysis of banking regulation in Indonesia and the UK

This thesis addresses ineffectiveness of Indonesia banking regulation, particularly capital and liquidity provisions. It presents the view through the lens of Indonesia bank’s balance sheet, the level and direction of development of the Indonesian banking system, and the potential impact of the Indonesia regulatory environment that might either impair the efficient and safe operation of a bank or influence the soundness and safety of a bank institution. The original contribution of this thesis is to explain how the potential impact of the existing Indonesia regulatory environment influences the soundness, health and safety of a bank institution and enhances the possibility of a bank institution failing. The existing banking law and prudential provisions in Indonesia are simple, short and too general in regulating and protecting banks from failure. However, the current regulatory environment in Indonesia cannot mitigate all risks comprehensively which are posed by Indonesia bank’s balance sheet, the level and direction of development of the Indonesian banking system. Consequently, events of bank failure, such as Century Bank in 2008 and failing banks, such as Muamalat Bank in 2017 and Bukopin Bank in 2020, might potentially recur in the future. For example, under the existing Banking Act 1998, the absence of common definition or understanding of ‘other form’ under bank definition and lack of further provisions or instructions or guidelines on the implementation or processes of unregulated activities could augment implicit banking risks in Indonesia. Furthermore, Indonesia banks highlight the compliance with 3 pillars of Basel III under current Indonesia capital provisions. They regulate minimum capital level but do not provide comprehensive provisions due to covering only briefly and simply the tasks and powers of supervisory authorities; no technical standard assessment procedure or methodologies are used for review and assessment; and there are no explicit disclosure requirements. This potentially lowers supervision, review, accuracy, consistency and reliability of capital calculation and bank minimum level. Moreover, Indonesia banking provisions have a further fundamental flaw associated with the liquidity provision. The meaning of LCR is less robust because it could potentially lead to or increase possibility of illiquid banks, resulting in potential vulnerabilities to liquidity runs. It further shows how the concern of illiquidity might arise as HQLA of Indonesia banks could not cover net liquidity outflow. Therefore, there is a need for reform of Indonesia banking regulation particularly ex ante prudential provisions. The reform might be performed through adopting provisions or an approach from another country, notably the UK. The thesis will analyse the possible reform of Indonesia banking provisions and the possible impact of adoption of the components or levels of the UK provision. Based on this analysis, it will also make several proposals for future Indonesia regulatory environment.