Vol 16 (2019) - Issue 2

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Reflections on Century Bank: A Failed Bank in Indonesia

Synopsis

Despite the extensive reforms of financial structures and regulation in Indonesia, this article contends that the program to reform bank capital in Indonesia remains imperfect. We assert that to further strengthen the capital structure in Indonesia, authorities should consider a tool to maintain financial stability. One of the critical matters to arise from Century Bank in Indonesia was the contribution of moral hazard on the part of the bank owners to the bank’s failure. The reasons for the failure of Century Bank in Indonesia are not straightforward. Due to lack of space, it is unfeasible for the current article to analyse the many drivers of this bank’s failure, which included lack of financial supervision and enforcement, shortcomings in the financial institutional structure and regulatory system, corporate governance, macroeconomic condition, economic behaviour and risk management procedures. Therefore, we will focus solely on analysis of moral hazard and capital structure as causal reasons for the failure of Century Bank. The article is structured as follows: in section 1 we present a brief case study analysis of Century Bank in Indonesia. In section 2, we summarise the regulatory and legislative response to Century Bank in Indonesia. In section 3, we focus on moral hazard and capital structure as causes of the failure of Century Bank. In section 4, we provide two recommendations for further reform to mitigate moral hazard and improve the capital structure. In section 5, we provide conclusions.