The Indonesia Deposit Insurance Corporation can now raise its own funding and provide temporary liquidity support to banks outside of resolution.

Indonesia has granted the LPS (Indonesia Deposit Insurance Corporation) additional powers to assist the OJK (Financial Services Authority) in preventing bank failures, as part of efforts to ensure financial system stability.

Previously, the LPS’s main role was to insure retail deposits by collecting fees from commercial banks. It was only able to rescue insolvent banks by liquidating them, selling or transferring their assets, and reviewing and canceling unprofitable agreements to help solve liquidity problems.

The LPS can now place funds in banks outside of resolution during the economic recovery from the impacts of Covid-19, subject to a maximum 2.5 percent of its assets in any one bank, and a maximum 30 percent of its assets in all banks.

The regulation only allows the LPS to place the funds in a bank for a maximum one month, with up to five extensions.

As of end-2019, the LPS had total assets of IDR 120.6 trillion (USD 8.2 billion).

Moody’s says the new regulation is credit positive for Indonesian banks as it provides them a source of government liquidity aside from Bank Indonesia.

It expands the Indonesian government’s financial toolbox and helps prevent bank insolvencies and failures, while also freeing up Bank Indonesia to focus on broader financial market stability, the ratings agency said in its 16 July Credit Outlook.

The regulation also gives the LPS a joint supervisory role with OJK over banks already under close supervision, which will “improve regulatory oversight and speed up the resolution process,” Moody’s said.

The regulation also allows the LPS to raise its own funding through repo agreements with the central bank, sales of government securities to the central bank, issuances of debt securities, and as a last resort, government borrowings.

Additional reporting from Jakarta Post, Reuters.

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