Indonesia's central bank yesterday threatened to withdraw guarantees on domestic bank deposits and letters of credit if they fail to cap spiralling savings rates. But the bank said it could not find anything in its arsenal to make foreign banks keep rates below limits announced this week, raising concerns over the potential for a two-tier interest rate system. 'I am embarrassed to say that there are no penalties under the legislation we can apply on foreign banks,' a central bank source said. 'There are no conditions to make foreign banks subject to the ceilings.' Bank Indonesia this week said it planned to peg domestic dollar time deposit rates to those offered on its short-term promissory notes. Banks would be able to offer deposit rates only at a maximum pre-set rate over SBI government bills. The SBI rates would now be based on the Singapore interbank offered rate (Sibor) instead of Jakarta's equivalent, Jibor, which has been somewhat higher and more volatile. The move was meant to end the recent deposit rate war and provide all banks with a level playing field, whether they be big or small, local or foreign. There had been concern that domestic banks, particularly small ones, had been offering increasingly excessive deposit rates to attract savers and stem the tide of deposits shifting to seemingly safer foreign or larger domestic banks. Bank Indonesia met the banks on Wednesday to make its threats and underline the importance of sticking to the rules. When it met foreign banks the following day, however, they pointed out the central bank had no authority to wield the same stick. While domestic commercial and state banks will have little choice but to toe the line and peg their official deposit rates according to new central bank ceiling, branches of foreign banks in Indonesia will now be left free to do largely as they please. Instead of creating a level playing field, the central bank's initiative has backfired and offered foreign banks an unfair advantage. 'They can't really control foreign banks,' Helen Teng Zuanic, a banking analyst at Sassoon Securities Indonesia, said. Official deposit rates had soared to a crippling 25 and 30 per cent in recent weeks as rival banks slugged it out to lure much-needed depositors' funds. Unofficial rates at some smaller banks had been up to 10 per cent higher for large deposits. Such high rates had been proving crippling for small banks desperate to attract funds to meet their obligations and higher deposit rates were the price they had to pay.