OJK, our better hope for better bank supervision

The Jakarta Post, Riyadi Suparno, Jakarta, Mon, 12/21/2009 11:46 AM, Review & Outlook

JP/J. Adiguna

If the Bank Century scandal has an important lesson for the future it is the importance and the need to build better bank supervision. Unfortunately, we cannot trust Bank Indonesia on this important mission.

With the emergence of the Bank Century debacle, we all know now that BI has really spoiled the trust of the public to better supervise banking supervision. Even then, BI governor Boediono, now Vice President, admitted that banking supervision is one of the areas at the central bank that needs reform.

Bank Indonesia currently faces two problems with regards to its banking supervision.

First, it lacks a credible system in supervision and second, its supervisors lack the integrity needed to carry out their duties.

To be fair to BI, we should acknowledge that the central bank has tried to improve the performance of its banking by improving its supervision system. It has also tried to break the unholy alliance between supervisors, bank managers and owners by repositioning and moving supervisors around banks.

But the move is considered too little and late, considering the already entranced interests involved in such an unholy alliance. Moreover, there appears no penalties are being imposed to recalcitrant banking supervisors, such as the ones responsible for supervising Bank Century.

As already widely reported, Bank Century owners, with the help of its managers, robbed the bank repeatedly for several years in front of the supervisors’ own eyes. According to the Supreme Audit Agency’s (BPK) investigative audit report, out of Rp 6.76 trillion (US$716 million) of bailout fund, Rp 5.86 trillion was to cover losses from criminal offenses committed by owners, managers and affiliated parties.

As the problem with banking supervision at the central bank is so deep and hard to mend, it’s time for us to move on to our reform plan to establish the Otoritas Jasa Keuangan (OJK), or Financial Sector Authority, to take over the banking supervision function from the central bank.

In fact, its establishment is the mandate of the 2004 Bank Indonesia Law. Article 34 of the law stipulates that the supervision of banks will be carried out by the OJK. OJK’s establishment should occur before Dec. 31, 2010.

The OJK will supervise not only banks but also financial companies such as securities firms, leasing companies and insurance, which are currently regulated and managed by the Finance Ministry.

But it is not clear how the relationship between the OJK, Bank Indonesia, the Finance Ministry and the Deposit Insurance Corporation (LPS) will look. We are awaiting the bill to be drafted out by the Finance Ministry.

Looking at the current situation, where Finance Minister Sri Mulyani Indrawati is under attack because of her decision to bailout the trouble-ridden Bank Century, it is hard to expect that she could finish the drafting of the OJK bill on time and pass the bill through the hostile legislators.

Many politicians, especially those with personal interests, are using the Century scandal as a means to target Sri Mulyani and even remove her from her position as the finance minister, although her decision is considered by many independent banking experts as the right decision in a time of crisis to save the country’s banking sector from collapsing.

These hostile legislators could collaborate with the bad guys at the central bank to block the passage of the bill. The usual argument used by Bank Indonesia officials who disagree with the establishment of the OJK is that with banking supervision under Bank Indonesia, the central bank monetary policy would be more effective. Sensible enough, but that’s not the real reason; the real reason is that they did not want to lose their “lucrative” banking supervision business.

These people might also use the argument that establishing the OJK is not a guarantee that a Century-like scandal could be avoided, considering that experiences in developed countries that have independent supervisory systems.

The UK financial sector, which is supervised by a financial services authority, and the US financial sector, supervised by the central bank, both failed to detect or react early to the recent financial crises that started in the US and the UK. So, either way, any system could fail. So, it’s not a strong ground to reject the OJK.

Despite all these gloomy notions, Sri Mulyani this time might get the badly needed support from an unlikely corner, such as from Bank Indonesia, which in the past had vehemently opposed to the establishment of the OJK.

Bank Indonesia Senior Deputy Governor Darmin Nasution, who is Sri Mulyani’s long-time close ally, has openly expressed his support for the OJK. He even said an independent financial authority would be able to reduce lending rates, which remain consistently high, despite the central bank’s repeated interest rate cuts.

So, there are possibilities that this bill will make it into the law next year, and therefore, it is important for the finance minister to unveil the bill for public scrutiny so that it would be able to lay the ground for the best possible institution to help build a more solid banking industry.

The author is a staff writer at The Jakarta Post.