Muninggar Sri Saraswati & Adrian Wibisono – Indonesian Vice President Boediono, addressing a roomful of lawmakers on Tuesday, defended the central bank's decision in 2008 to bailout ailing PT Bank Century, saying that the collapse of even a small bank in times of crisis could bring dire consequences to the country's banking sector.

During an open, high-profile hearing with the House of Representatives' special committee investigating the Rp 6.7 trillion ($710 million) bailout, Boediono remained composed and confident as he answered questions. "The bailout in the situation at that time was the best decision," he said.

The vice president's reputation, integrity and position have come under fire as the Century case has become the focus of political maneuvering.

Boediono said that in 2008, there were several indications that banking conditions in Indonesia were in peril, including unstable reserves, banks stopping giving loans to each other, mounting rumors about sick banks and fluctuating foreign exchange rates.

Those indications resembled the 1997-1998 period when Indonesia and much of Asia suffered a severe economic crisis, he said. "In a situation of crisis, public psychology could easily incite panic," said Boediono, who headed the central bank at the time the bailout decision was made.

On Monday, Boediono's predecessor at the central bank, Burhanuddin Abdullah, and former deputy governor Anwar Nasution told lawmakers they considered Century a small bank whose collapse would be unlikely to prompt a systemic crisis.

Finance Minister Sri Mulyani Indrawati, who approved the bailout in her capacity as chairperson of the Financial System Stability Committee (KSSK), has said that the bailout was approved because of fears that Century could have a systemic effect on the banking system.

"If only they were in our position, [they] would have taken the same actions. Our data was OK to decide quickly to contain the effect," Boediono said, referring to Burhanuddin and Anwar.

Boediono also rejected a conclusion of the Supreme Audit Agency (BPK) that suggested that the central bank had changed its short-term loan facility policy to benefit Century, which is now known as Bank Mutiara.

The policy initially required a bank to have a minimal Capital Adequacy Ratio (CAR) of 8 percent, to be eligible for short-term government loans, but in 2008 that was changed to banks merely having to have a positive status.

Bank Century's CAR was 2.35 percent positive when it applied for a Rp 1 trillion loan from the central bank.

The central bank's decision to change the policy, Boediono said, was taken to try and stop the financial situation from disintegrating. "We decided to change the requirements for the short-term loan facility policy and changed the required CAR to try and salvage the situation and help avoid a greater crisis," he said in response to a question from a lawmaker.

At the time the regulation was revised there were three banks, including Century, that had a CAR below 8 percent, Boediono said.

CAR is a ratio that banking regulators use to watch a bank's health, specifically the bank's capital to its risk exposure. Regulators track a bank's CAR, a measure of how much capital is used to support the bank's risk assets, to ensure that it can absorb a reasonable amount of loss.

Replying to another lawmaker's question as to why the bailout sum ballooned from the initially planned Rp 632 billion to Rp 6.7 trillion, Boediono said that "the calculations became very dynamic during the crisis. It was based on daily developments."

Boediono said he would abide by the ongoing probe but he challenged lawmakers to prove suspicions that the bailout was the result of a conspiracy between central bank officials and the owners of Bank Century.

"If there is any suspicion about a conspiracy, then please prove it. You have to have evidence so that no innocent person is punished," he said.

Special committee chairman Idrus Marham, from the Golkar Party, said that Boediono was expected to appear before the committee another time to offer further explanations on the short-term loan policy and the KSSK.