Arena of Multiinterets

CHAPTER I

INTRODUCTION

PT Bank Century was founded from a merger of three banks at December 6^th, 2004. The banks were PT. Bank CIC International, PT Bank Pikko, and PT. Bank Danpac.  Historically, PT Bank CIC had some fictional and high-risk transactions. The amount was up to US$25Billion. Regulation requires the bank to accumulate PPAP, which in turn result in negative Capital Adequacy Ratio (CAR),

Bank Pikko contained Texmaco’s bad debt, which was changed to Dresdner Bank Medium Term Notes (MTN). The low quality of MTN required the bank to accumulate a big amount of provision in loan losses. Which in turn also result in negative Capital Adequacy Ratio (CAR),

In Indonesian Central Bank report dated at October 31, 2005 found that CAR of PT Bank Century dated at February 28, 2005 (two months after merger) was negative132.5%. Due to regulation, since the report the bank should be put in special surveillance. In fact the bank was normally operating until the end of 2008. Global financial crisis finally caused liquidity crisis to the bank. The bank was marked as a systemic risk bank, which legalized it to be bailed out. So the government had to put in some temporary equity.

The phenomena in Bank Century case is interesting to further studying, considering long before the bank already had problems which climaxed in Global financial crisis. This ignites a question, why it should be marked as a systemic risk bank?

Kaufman (1996) finds that a bank bankruptcy in fact is as common as any other bankruptcy. They are caused by non prudential regulation, inefficiency and contra productivity. Davis (1992) argues that people are more afraid to financial and banking systemic risk rather than other sectors such as automotive or real estate, because the intangible situations are more difficult to predict. Mark Flannery (1995) has similar argumentation with Davis, bank bankruptcy costs higher so banking business is unique and it always needs financial assistance because it includes social aspect and politic of business is sensitive to conflicts, these factors require the prudential principles of banking industry. 

Researches of bank bailout done before emphasize on bank failure caused by non prudential conduct in normal situation. They do not consider financial crisis, also not in Indonesian context. This research unique because it reviews a bank bailout in a global financial crisis and that Bank Century was the only bank undergone liquidity crisis which needed to be intervened by Indonesian government.

This research also argues that the failure of Bank Century was not market failure, but a governance and regulation failure. The failures had happened before global financial crisis. This enlightens the theory of how a bank bailout should be done in time of financial crisis.

This research will:  a) review financial performance of BC, b) review financial performance ratio by various financial theories to explain the feasibility of BC, c) qualitatively analyze the application of corporate governance and fraud theory in BC.

The goals of this research are:

1.     To review financial performance of BC by financial theories. To give empirical proof that the amount of government temporary equity is adequate to bail out BC. To review systemic impact of BC to national economy.

2.     To find out if it is feasible to bail out BC when it is reviewed by corporate governance theory and fraud theory.

3.     To take a lesson from this case, for more effective decision making when the government need to intervene in banking sector to stabilize national banking. To find out if government temporary equity able to stabilize banking sector.

4.      To propose a new theory of bailout bank, to avoid governance failure and regulation failure.

This research uses interpretative qualitative method to explain the case of PT. BC. Compared to quantitative method, Qualitative method is unique because it is able to do in-depth analysis to the related factors and/or actors. Data collection by interviewing gives opportunities to analyze the truth at the time being.

CHAPTER II

LITERATURE REVIEW

Former researches about systemic impact bank performance are using traditional financial theory. This theory analyzes bank performance from fundamental aspect which is consisting of the four pillars of economy (Statman, 1999, Daniel and Titman,1999). The four pillars of economy are: portfolio principles ( Markowitz, 1952), arbitrage (Miller and Modigliani, 1961), Capital Asset Pricing Theory (Sharpe, 1964; Lintner, 1965; Mossin, 1966), and option pricing theory (Black and Scholes, 1973 Merton, 1973).

Fundamental values of a company explain that market price of the shares is similar to its fundamental condition. The fundamental condition can be seen in financial report and its ratios such as liquidity, rent ability and solvability.  On the other side, for public companies traders are important parts of the global game. They do not judge by fundamental values only. When there is mispricing, the chance will be used to gain profit by any trader.  ‘Buy low, sell high’ is their motto. This attitude of using mispricing as a chance to benefit is rational and it is known as arbitrage theory (Friedman, 1953). This way of thinking makes market risk becomes the determinant factor of share return (Sharpe, 1964; Lintner, 1965; Mossin, 1966). By this mind frame we come to the concept of portfolio. The Portfolio theory suggests a hypothesis on the basis of which, expected return on a portfolio for a given amount of portfolio risk is attempted to be maximized or alternately the risk on a given level of expected return is attempted to be minimized. This is done so by choosing the quantities of various securities cautiously taking mainly into consideration the way in which the price of each security changes in comparison to that of every other security in the portfolio, rather than choosing securities individually. In other words, the theory uses mathematical models to construct an ideal portfolio for an investor that gives maximum return depending on his risk appetite by taking into consideration the relationship between risk and return.

The attraction of the CAPM is that it offers powerful and intuitively pleasing predictions about how to measure risk and the relation between expected return and risk (Sharpe, 1966; Lintner, 1965; Mossin, 1966). Unfortunately, the empirical record of the model is poor—poor enough to invalidate the way it is used in applications. The CAPM’s empirical problems may reflect theoretical failings, the result of many simplifying assumptions. But they may also be caused by difficulties in implementing valid tests of the model. For example, the CAPM says that the risk of a stock should be measured relative to a comprehensive “market portfolio” that in principle can include not just traded financial assets, but also consumer durables, real estate and human capital.

Option pricing by Black–Scholes model was first published by Fischer Black and Myron Scholes in their 1973 paper, "The Pricing of Options and Corporate Liabilities", published in the Journal of Political Economy. They derived a partial differential equation, now called the Black–Scholes equation, which estimates the price of the option over time. The key idea behind the model is to hedge the option by buying and selling the underlying asset in just the right way and, as a consequence, to eliminate risk.

Shleifer and Summers (1990) say that there are two pillars in behavior finance theory which influencing investor’s decision ; limited arbitrage and investor’s psychological bias. These two pillars determines buy or sell position of a rational investor when he senses a mispricing. De Long et.al. (1990) continues by Shleifer and Vishny (1997) propose that the risk of a rational investor is the arbitraged share value. That is; noise traders mislead decision when a rational investor should always decide on fundamental data. This distorted attitude happens because deviation in information process and limited ability to have the right information.

Slovick (2012) says that systemically important bank theory based on calculation of equity structure. Some banks are systemically important if they had 70% of total assets of banking industry in the country, calculated by weighted average of its asset to national banking total asset. Consequently the SIBs will also have 70% of total equity in banking industry. In Indonesia systemically important banks consist of 15 (fifteen) banks, private’s or government’s. They are : Mandiri, BRI, BCA, BNI, Danamon, CIMB Niaga, BII, Panin, Permata, BTN, OCBC NISP, Bukopin, Mega, BTPN, and UOB Indonesia (appendix 9).

Research gap emerges because classical assumption test by financial performance theory and systemically important bank theory is not met. The researchers use behavior finance theory, and corporate governance and fraud theory to test the systemic impact of the bank.

Widoatmodjo (2010) researches about systemic impact of PT BC by probit and logit regression to test investor behavior in BEJ. He finds that in the end of 2008 investor was not behave rationally. Negative sentiment in the market could be a dominant factor for the society to rush bank if PT BC was closed. In other words, it is possible to consider PT BC as a systemic impact bank.

Corporate governance is a concept to enhance corporate performance by monitoring management performance and accountability based on a set of rules. Corporate governance builds a structure to aim at certain goals and acts as tools of performance monitoring (Dharmawati, dkk, 2004). Corporate governance will reduce agency cost and also improve corporate image and reputation (Akhtaruddin, Hossain, Hossain, and Yao, 2009). Corporate governance in banking is even more important because some considerations. Firstly, bank has a dominant position as an economy growth machine (King and Levine, 1993). Second, in a country with undeveloped equity market, bank is the main institution of lending. Third, bank is the prime institution to national saving mobilization. Fourth, bank liberalization by privatization and economy deregulation gives the bank’s manager broader power to operate a bank.

Banking institution has a specific nature which makes it different from non financial institution (Macey and O’Hara in Supriyatno, 2006). The uniqueness of this nature blends with the situation of Asian financial crisis lead this research to corporate governance problem (Arun and Turner in Supriyatno, 2006). Deficiency in practicing corporate governance makes worse the economy of such countries in 1997 to 1998 (Husnan, 2001).  The application of corporate governance can be seen in audited financial report of a company. Financial report is a tool for a company to inform its condition to its stakeholders. This information has to meet quantitative and qualitative standard (fundamental concept of financial report). Information should be focused to general need of its stakeholders, not to cater to certain individual benefit. When a financial report arranged to certain need and want of a party it will cause fraud risks, the report does not inform the true condition of the company.

According to BPK (2008) the definition of fraud is:  misinterpretation of past and present, of material facts, make knowingly or recklessly, intended to make a party act, and the party suffers a detriment because of the misinterpretation.

ACFE (Associaton Certified of Fraud Examiners) mentions three types of fraud:

·      Asset misappropriation: misuse or stealing company’s asset. This type is tangible and the value is able to be defined.

·      Fraudulent statements: financial arrangement in financial report to benefit illegally.

·      Corruption: includes in corruption are conflict of interest, bribery, illegal gratitude, and economic extortion.

Gravitt (2006) and Nguyen (2008) say that fraud in financial report has certain schemes: 1.) falsifying, changing, or manipulating financial material facts, supporting documents, or business transaction. 2.) Intentional negligence or misrepresentation of events, transactions, accounts, or other important information. 3.) Intentional misuse of accounting principles or procedures to measure, to disclose, and to report economical events and business transaction. 4.)  Intentional negligent in disclosure or improper disclosure representation.

The link of corporate governance and fraud can be explained as follow: a.) Corporate governance includes company culture and authorization delegation is designed to eliminate fraud. b.) Transaction level control process by internal auditor is a control and preventive process to ensure that only legitimate transaction takes place in the system. c.) Retrospective examination by external auditor is aimed to detect fraud before it becomes big and dangerous for the company. d.) Investigation and remedial by forensic audit to determine remedial act related to size or depth of fraud. Tiscini and Donato (2004) propose that relating to CG and fraud in private and Government Company, accounting fraud tend to be caused by excessive power, while in public company accounting fraud tends to be caused by performance stress. The role of TMT (Top Management Team) in upper-echelon theory ( Hambrik and Mason, 2004) proposes that TMT is the most crucial issues of company performance. TMT can be an elite team of management, or one or more of the owners, or majority share holder.  Finkelstein and Hambrick (1984) find that TMT has more power than the management. In other words, TMT has strong influence on strategic implementation, operational and internal innovation process.

In case of PT BC, the role of TMT by dominant share holder (RT) is strongly influencing strategic decisions. Thus, to analyze bank’s internal problem by corporate governance and fraud, it is also important to analyze the role of TMT.

Paul Krugman, the winner of economy Nobel Prize says that in the 21^st century, the possibility of economy recession increase to 50% if compared to the centuries before (Prasetyantoko, 2011).  Economy crisis in 2008-2009 is defined as economy recession because it was short term, Brut to Domestic Product declines for 6 months in a row. The signs are increasing unemployment level, stagnant salary level, and declining retail sales. World Bank and ASEAN secretary in 2009 claimed that global economy crisis in 2008-2009 caused declining income per capita in the countries throughout the world.

The main question of this research is that considering all those facts, did the failure of PT BC have systemic impact to Indonesian banking system? Systemic means it will affect the entire organs of banking industry. According to government regulation about Jaring Pengaman System Keuangan  (JPSK) or PERPPU JPSK, systemic impact is:

‘… a difficult condition caused by a bank, non bank financial institution, and/or financial market turbulence, which when it is not handled properly will cause failure to a number of banks and/or non bank financial institution, and the people would lose trust to financial system and national economy.’

In PERPPU JPSK the criteria and size of systemic impact bank is not clearly defined. The nature of Systemic impact can be internally or externally. Internal means the problem springs from inside the bank such as non-prudential act, while external cause could be natural disaster, global financial crisis, or war. Thus, in such cases it is difficult to demarcate the systemic impact of the bank. A financial institution can be systemic in certain situation, but not systemic in other situation. The indicator of systemic also not mentioned explicitly in any law code, the reason is that it would cause moral hazard and to measure the systemic impact is situational.

The Bank of Indonesia adopts European Union MOU Framework which says that consideration of systemic impact has some aspects: financial system, financial market, payment system, real sector, and market psychological aspect. Market psychological aspect is added to the criteria in relation to economic crisis in 1998. At that time, the closure of 16 banks –which has only 2,3% of banking total asset- psychologically affecting financial market. It ended up with saving withdrawal in all banks nationally and caused crisis in various sector. Further, in the era of cyber dimension, cyber gossips (Wysocki, 1998) magnify the irrational behavior of investor through various rumors spreading in the internet.

This research does not discuss whether bank rush, nor capital flight, would happen if PT BC was closed in 1998 but approaches the problem from multidisciplinary points of view government-politic-economy. Seligman (1962; 345) proposes that political factor need to be related to economy and social changes in the society. Heilbroner (1977) proposes that if economy science wants to keep relevant to modern problems, the science have to keep in pace with three area of concerns: political consideration needs to be explicitly introduced in economic decision, political dimension needs to be broadened in economic decision, and the science needs broader paradigm. Ilchman and Uphoff (1977) propose that economic decision needs to go through integrated social science of public purpose. In short, economic decision making needs to be approached multidisciplinary and considers all relevant interest in social and political perspective.

Another important factor to consider in economic decision making is Risk. As Admati says (2013);

‘… When policymakers ignore risk, all of us may suffer in the end. A stark example was provided in Japan, where corrupted regulators and politicians colluded for years with Tokyo Electric Power Company and ignored known safety concerns. When an earthquake and a tsunami happened in2011, this neglect led to a nuclear disaster that was entirely preventable…’

Admati (2013) proposes that banking system is not difficult to understand, that all issues will move quite straight forward if all is purely banking consideration without any conflict of interest from the politicians.

Politicians, regulators, bank inspectors, and other parties in national banking always want the national banks attractive in international banking industry. Attractiveness for a bank means trustworthiness so regulations are formed for that purpose. It is to keep the country financial system stabile. Admati (2013:200) says that the banks ‘are where the money is’. Money is the main goal and source of power. To control the money, bankers are in the strong position to influence the society together with politicians and government regulations. History shows that politicians have often used banks as money machine in political interests. When politicians, regulators, and monetary authority have various interests in making a regulation for banking, these phenomena known as   ‘regulatory capture’. These actors created a Political Arena in banking system. Together they create a situation to achieve various interests while they are ‘securing national financial stabilization’. As an example, the policy of minimum reserve requirement tends to get higher in financial crisis. Beside the noble purpose of securing the trustworthiness of the banks, this regulation gives chance to the government to get free loan from central bank, thus the reserve requirement is indirectly financing the government. Even though this regulation capture are not always being negative, we also need to consider grabbing hand or helping hand theory, which says that government intervention used to be laden in corrupted interest when the intervention has neither transparency nor accountability in the process (Hopkin and Pose, 2007).

In 2008, the Indonesian government wanted to win back banking trustworthiness that they gave blanket guarantee for deposit account up to Rp. 2Billions. Viewed from politic economic policy, this move was to influence market mechanism by win back society’s trust, not by building mutual trust market.

In the case of PT. BC the regulators should have analyzed three main layers to build a healthy intervention decision: market failure, corporate governance failure, and regulation failure of Indonesian Central Bank. The case began by liquidity problem when a depositor wanted to draw back his money. PT BC could not pay its obligation because of its illiquid investment in non rating, unmarketable securities. Meanwhile, PT. BC did not keep its reserve requirement on the 12% level as it should. Behavior finance theory was used when the government believed that its default would cause systemic impact, considering that the world was facing global financial crisis. Considering there was also rumor of negative market sentiment, a closure of a bank would affect government credibility, and all the individual investor would lose trust to banking system. At such times when legislative and presidential election was very near it was dangerous for national stability. At this point, the government decided to settle the liquidity mismatch of this bank. Whether or not BC followed the regulation of Indonesian Central Bank in accord with basic rules of Indonesian Banking Architecture was not being considered in the decision. Fraud that had happened inside the bank was given even broader scope by the amount of money injected right into the bank. It was a failure to analyze banking system problems. Corporate governance failure detected as a market failure, in turn it caused regulation failure. In that time of crisis, the multi interests of bankers, politicians, and regulators has created a situation that politically constituting the bail out. The finding of this research is that the bank was bailed out because it was too politically significant to fail.

CHAPTER III

METHODOLOGY

a. Sample

As a sample, this research takes PT. Bank Century which operated from 2004 to 2008 along with its subsequent event data, supporting data of Central Bank of Indonesia, depositor insurance’s data, and all relating data from various institutions in 2004-2008

b. Data Collection

This research uses time series method in interpretative case study. The subjects are : executive officers of PT. Bank Century in 2004-2008, the owners of the bank (RT) and RAR, ex Vice President of Republic Indonesia (JK), ex Government of Bank Indonesia (BO), ex Ministry of Finance Republic Indonesia (SMI), Pansus (DPR) of BC, Bareskrim Polri, BPK RI, Officers of LPS, officers of KPK, ex officers BC and all relating institution. Information is taken by interviews/letter/e-mail, in depth analysis and direct observation.

c. Data and Source of Data

Primary data are taken by interviewing ex decision makers in the bail out and ex officers of PT. Bank Century. Secondary data are from annual report of PT. Bank Century, investigation report of Indonesian Central Bank, Audit report of BPK, and all the supporting data. Press release, newspaper reports are also analyzed to enrich in-depth analysis.

d. Data Analysis Technique

Sampling technique by purposive sampling, data collection by observation, interview, and secondary data analysis

e. Data Observation Technique

Data observation is done by triangulation system. Primary data are grouped in peer debriefing. Secondary data are grouped and used to check subjects’ opinions.

f. Bias Minimizing Technique

Bias is minimized by triangular model based on analysis content of primary and secondary data. Adjustment theory of before end theory and after end theory is also used to minimize bias.

g. Reason of Case Study

The case of PT BC is chosen because of its national issues. The scale and complexity of the case is massive and logical. The case can be accessed by available sources, in certain time limit. These considerations make the case both worthy and feasible to be observed.

CHAPTER IV

FINDING AND DISCUSSION

RQ-1). Considering internal problems of PT Bank Century since 2005, was it worthy to be bailed out, and was the amount to bailout appropriate?

In appendix 1. Financial report of BC, we can see time series data shows that foreign exchange securities, acceptance liability, and non performing loan made PT BC needs a very large amount of PPAP. Inability to meet the standard amount of   PPAP made its CAR negative (see appendix 14,15). Detail calculation of CAR also shows that the appropriate amount to bail out was Rp 5,724.541 million. So RQ1 is answered: Viewed from internal condition it was not worthy to bail out PT.BC. This differs from Darmin Nasution (2008) that government temporary equity is needed to rescue a bank. It supports macro economical view that BC should be bailed out to keep national banking stabile and to build banking trustworthiness in global crisis. This is in accord with Budiono (2008) that government intervention is needed to avoid domino effect because of BC’s bankruptcy.

The important finding is that the amount to bail out was excessive and was used inappropriately. The Internal management of PT.BC proposed to get bail-out fund Rp 6,816.82 Trillion (see appendix 7). The government gave the fund as temporary equity by total amount Rp 6,762 Trillion. In appendix 8 we can see the factual using of the money; Excessive fund Rp 1,561.01 Trillion liquidity placed in BI, Excess liquidity Rp 631.97 Billion was used to buy SUN and be placed in other bank Rp 281, 40 Billion. There were other interests rather than merely keeping national banking stabile and building banking trustworthiness. We can see that some fund was used to settle FPJP BI and interest Rp 706, 21 Billion, to pay BUMN/BUMD/Yayasan Rp 553, 48 Billion, to pay affiliate deposit Rp 80,70 Billion. Actual fund needed should have only Rp 2, 840.06 Trillion to pay third party deposit. The other outflows should not happen and had no importance to keep national banking stable. In other word, the amount Rp 6,817 Trillion was used to bail out frauds.

RQ-2). How was the internal problem viewed from corporate governance theory and fraud theory, in accordance with prudential banking principals? 

Considering frauds inside BC, and misapplication of good corporate governance with total amounts of Rp 6,817.82 Billions (see appendix 7) , it was unworthy to be bailed out by government temporary equity. This finding is different from Darmin Nasution (2008) about bank rescue feasibility criteria.

Financial report of PT BC shows that problem of corporate government and fraud in PT BC was very complex. It was not wise to bail it out while its default was not caused by financial crisis, but because of weak governance, imprudent banking, and owner’s fraud.

The answer to RQ2 shows that considering corporate governance theory, it was inappropriate to bail out PT BC. To bail out PT BC was to bail out any fraud by dominant shareholder and its management, as if the bailout was to cater to certain party’s interest. This finding shows that political interests have higher priority than other normative criteria to or not to bailout a bank. The decision to bailout should be viewed in macro politic context in the multi interests of the decision makers. There was strong connection between political and economical factors. Failure to understand this big picture will create narrow-minded financial or banking science

RQ-3). Was the decision to bail out relevant to national banking stabilization?

The decision to bail out was to maintain national banking stability. At the end of 2008 the condition of financial market was on the verge of crisis. (see appendix 2,3,4,5,6 conditions in financial crisis, distress of financial market and its threats). Considering these points, government intervention was unavoidable. The timing was very close to presidential and legislative election in early 2009. An election is a door to big changes and a political arena for many interests. To maintain national banking stability and trustworthiness mean maintain politic stability, which is very important in such timing. Consequently, a lot of decisions will be considered from various interests of the actors. The decision to bail out PT BC was one of such decisions.

After the decision, it was a fact that Indonesian financial market improved. See appendix 10,11,12,13).

RQ-4). Was the failure of PT Bank Century in 2008 a symptom of market failure, or a governance failure of PT Bank Century and a regulation failure of Indonesian Central Bank?

PT BC default in the end of 2008 was not market failure, but it was corporate governance failure and Indonesian Central Bank Regulation failure caused by asymmetry information of PT BC’s internal condition.

Market failure was only a trigger to PT BC default. PT BC failed to pay its obligation when a big depositor withdrew his saving. On the other hand, the failure was caused by long track of                            imprudent banking (there are 15 types problems find by auditor Bank Indonesia). Indonesia Central Bank failed to analyze the banking system problems when it assumed that this default would systematically affect national banking stability.

Political interest of PT BC bailout can be mapped in the diagram below.

CHAPTER V

CONCLUSION

Related to economical and non economical aspects there are some conclusions:

1.     According to theoretical observation and its implications, the bail out of PT BC dominated by non economical reason. There were financial global crisis and the nation was in the verge of legislative and presidential election. The timing created a politic economic decision to bailout.

2.     To rescue a bank, accountability and transparency in the cash management is needed. So it is better to avoid cash bailout which tends to caused conflict of interest. A more effective tool is needed to rescue a bank.

3.     The researchers propose recapitulation procedure by obligation recapitulation as equity addition for the bank to avoid conflict of interest and political effect.

PT BC was not a systematically risk default bank (see appendix 9 of systemic important banks in Indonesia), and it was bailed out because of non economic reasons. This research defines it as ‘too politically significant to fail’. This is described in a scheme below.

  

a. Research Limitations

This research is limited on observation of economic theories and financial performance of PT BC, and the amount of fund to solve the problems. Political condition observation is limited to the timing at the moment, when a big political event was about to happen. The event was legislative and presidential election when government credibility was at the most crucial moment. This research also ignores various rumors in society about the source of fund, political interests and illegal conducts around the flow of fund. Interviews with some respondent also could not give any clear prove about success fee to withdraw deposits at that time.

b. Future Research

Future research needs to analyze the process of bank takeover. Does consideration of negative track record of the shareholders influence the government to take it over? Conflict of interest is common in private banks, and this phenomenon keeps going on. Audit inspector of BI is still having trouble with owners of the bank.

Future research also need to give attention why bail out mostly happens near legislative/presidential election. Is there any other reason rather than an economic motive to rescue a bank?

c. Suggestions

In this research, the researchers conclude that the bail-out the Bank Century by KSSK was aimed to stabilize the macro-economic and financial sector by using a certain amount of funds from LPS to defend more than Rp. 1,700 Trillion depository fund in Indonesian banking system (Sri Mulyani,2009). This decision was viewed from benefit-loss analysis as the government is lender of last resort for the banks (Krugman, 2011). In turn this decision would prevent domino effect of bank rush (Budiono,2013).

In accord with discussion with Mr. JK (ex Vice President RI), the researchers suggest that if BC  be rescued from bankruptcy it should not use bail-out technique. More efficient alternative is by giving additional working capital. This additional working capital could be attained by overbooking depository premium fund of LPS in other banks, transferred to the rescued bank either as loan or time deposit.

This alternative will solve the liquidity problem of the bank, which means the bank will be capable to redeem market volatility; in turn this will win back banking system trustworthiness. This alternative is more transparent and accountable because the depository premium fund of LPS will be recorded in detail in the bank, the fund will gain some revenue of interest for the government. This alternative will also avoid polemic of corrupted use of fund.

This suggestion can be applied to guide the decision makers when they face a situation ‘too politically significant to fail’, ceteris paribus.

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GLOSSARY

Bareskrim Polri (Badan Reserse dan Kriminal Kepolisian Republik Indonesia) is the Institution under Head of Police Republic Indonesia that doing inspections and investigate the crime in the public.

BI (Bank Indonesia) is the Central Bank of  Republic Indonesia.

BPK RI (Badan Pemeriksa Keuangan Republik Indonesia) is the auditor that works on behalf of the Government.

JPSK (Jaring Pengaman Sistem Keuangan) is a network system for financial and economic stability.

KPK (Komisi Pemberantasan Korupsi) is the Institutions in Indonesia that investigate corruption.

KSSK (Komite Stabilitas Sektor Keuangan) is a special task steering committee to stabilize macro-economic and finance sector of the nations.

LPS (Lembaga Penjamin Simpanan) is the Government Institutions in Indonesia that work as guarantor of the savings and deposits in the banks up to the certain amount decided in accord with Central Bank regulations.

PMS (Penyertaan Modal Sementara) is a bail-out technique by giving temporary government equity to the troubled bank.

SUN (Surat Utang negara) is a National Debt Letter issued by the Government of Republic Indonesia.