Banking Collapse and Restructuring in Indonesia, 1997-2001

Indonesia’s banking sector was devastated by the crisis that began in October 1997. Of the largest banks—the seven original state banks and the ten largest formerly private banks—none managed to remain solvent, and those that still operate under their original names do so only because they were bailed out by the government. 1 The number of private banks was halved from 157 to 79: 65 were closed, 9 merged, and 4 nationalized (Table 1). Most of the assets of the banking sector are now controlled by the Indonesian Bank Restructuring Agency (IBRA), which was set up to manage nationalized banks as well as the assets that the government acquired when it took over the liabilities of insolvent banks as a result of a blanket guarantee to bank creditors issued in early 1998. The net cost to the government of bailing out depositors will probably be at least 40 percent of annual GDP. The exact amount will depend on IBRA’s ability to collect doubtful debts and sell off its huge share portfolio. In order to amortize this cost over several years the government has issued a large volume of bonds, the value of which exceeds the total liabilities of the whole banking system at the time the guarantee was issued. Despite the resources that have been poured into the banking sector, however, its weakness continued to impede economic recovery as of mid-2001. The 1997–98 Banking Crisis The massive real depreciation of the rupiah in 1997–98, combined with the sharp rise in interest rates and the refusal of creditors to