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Lately, the term systemic risk we often hear of everyday, mainly related to the case of Century Bank. Actually what is meant by systemic risk? And how to conduct systemic risk management?

What is systemic risk?
Systemic risk is the risk caused by certain events, such as interference in the economy, or the failure of certain institutions, then causes a series of economic consequences, or a domino effect. The consequence of such causes significant losses suffered by the institution, volatility incredible price, so in extreme conditions lead to a series of failures in the institution and / or market failure.

Issue is now the center is crowded Century Bank of getting bailout from the Institute of Deposit (LPS) Rp6.7 trillion worth. Century at the banking portion was small at that time, the share of deposits is only 0.8 per cent, 0.42 per cent share of the credit, and 0.72 percent share of the assets. The question is, how can affect systemic Century?

Systemic risk can not be seen from the size of an institution. Once, when the economic crisis in 1997, 16 small banks that portion of its assets is only about 3% of the banks closed. Remarkable result, there was a good rush on the small banks to large banks are healthy, resulting in many banks have fallen and have taken over the government.

Although small banks, but if it could cause a domino effect to other institutions, it has the potential to lead to failure in the banking system. Although Indonesia is not directly affected by the crisis, but the pressure can be felt both in the real sector and capital markets. Before Century falls, the market had received a rumor that there are 5 banks experiencing liquidity problems due to less clearance, one of Century. Although it declared false news, but the fall of the Century of the opinion that led to rumors were true. Clearly, when Indonesia’s banking system under pressure. Moreover, Indonesia does not apply in full blanket guarantee as abroad.

First, closure of the institution, or allowed to go bankrupt. With this option, systemic risk is still there. Ideally be done when economic conditions are calm, not in times of crisis. An example is the closure of 16 banks in the 1997 crisis, and the bankruptcy of Lehman Brothers. The second event resulted in the failure of the financial system.

Second, these institutions merging or acquisition. Thus, the risk is absorbed by the institution that acquisition or risk borne together. An example is Bank of America is acquiring Merrill Lynch, which then was under pressure due to its poor financial condition of Merrill Lynch. However, there also see the successful merger of Bank Mandiri, which is a combination of the four banks that had problems.

Third, taken over or nationalized by the government, so the risk is borne by the government. As happened in the first crisis, the government took over many banks, including BCA, Danamon, BRI and Mandiri, then enter the recap bonds, to overcome the problem of capital shortage.

Finally, the government provides or bailout bailout, to address liquidity problems. It’s like the government of the Century and the U.S. government assistance for a number of financial institutions as well as GM and Chrysler.

So is a quick picture of systemic risk and how to handle it. Hopefully useful.