The Indonesian Deposit Insurance Corporation (LPS) says it is ready to place funds in banks that have liquidity problems by teaming up with the Financial Services Authority (OJK) to stabilize the country’s financial system.

The LPS would need to obtain a recommendation from the OJK, which is tasked with investigating banks’ assets, before placing funds in struggling banks for a maximum of six months to prevent bank failure, according to new LPS Regulation No. 3/2020.

“We have yet to receive any recommendations from the OJK, but we will be ready if banks ask for fund placement,” LPS commissioner board head Halim Alamsyah told a press briefing on Friday. “We are still waiting for the OJK’s endorsement, as some banks may ask for fund placement.”

According to the new regulation, banks with liquidity issues can file a request for fund placement with the OJK and will be eligible for fund placement if their stakeholders cannot solve the liquidity crunch and the employees are not doing anything inappropriate.

The LPS’ total assets currently amount to around Rp 128 trillion (US$8.79 billion), with some Rp 120 trillion parked in sovereign debt papers (SBNs), according to Halim. “According to our observation, this will be more than enough to manage the liquidity problems.”

The government has issued Government Regulation No. 33/2020 that gives the LPS more room to manage its own liquidity and to prevent banks from failing in an effort to help strengthen the country’s financial system stability.

The new regulation allows the LPS to place a maximum 2.5 percent of its assets in one bank and a maximum 30 percent of its assets in all banks.

Previously, the LPS was only able to take a reactive approach, as it was tasked with rescuing insolvent banks by liquidating them by taking over shareholder duty, selling or transferring assets and reviewing and cancelling unprofitable agreements to help solve their liquidity problems, as stipulated in Law No. 24/2004.

The COVID-19 pandemic has threatened the stability of the financial system, as it causes supply-demand shocks and weakens the financial industry and macroeconomy, the Financial System Stability Committee (KSSK) said in its first quarter report issued in May.

The banking industry’s capital adequacy ratio (CAR), meanwhile, stood at 22.16 percent in May, up slightly from 22.13 percent the month before, OJK data show. It continued to book an 8.87 percent increase in third-party funds in May.

OJK data also show that banks have provided 6.35 million debtors with credit restructuring worth Rp 695.3 trillion as of June 22, as part of the authority’s move to provide relief for borrowers affected by the outbreak.

Previously, publicly listed Bank Bukopin had to limit customers’ withdrawals due to liquidity issues and shareholder commotion that prevented them from injecting more capital into the bank. The reports triggered panic among customers, as the OJK tried to calm them, and pushed Bukopin’s shareholders to finalize the capital injection plan.

If struggling banks failed to improve their liquidity after the fund placement, the bank would be handed over to the OJK before being dissolved, according to the regulations.