Nod for Finance Super-Regulator After Six Years

Jakarta Globe, Dion Bisara | November 27, 2010

Bank Indonesia governor Darmin Nasution, right, shaking hands with Nusron Wahid, a Golkar legislator sitting on House Commission XI for finance. The commission has paved the way for a radical restructuring of the way banking and financial services are policed with an agreement to set up a long-awaited new supervisory authority. (Antara Photo) (Antara Photo)

Jakarta. Indonesian Lawmakers on Friday paved the way for a radical restructuring of the way banking and financial services are policed with an agreement to set up a long-awaited new supervisory authority.

A House of Representatives working committee discussing a draft bill on the Financial Services Supervisory Authority, known as the OJK, agreed on Friday that its board of commissioners would be vested with their full powers by Jan. 1, 2013.

“The board of commissioners will be formed no later than six months after the law is passed,” said Harry Azhar Azis, deputy chairman of the House’s Commission XI, which oversees finance and banking. The House expects the bill to be passed before the end of this year.

“Other matters, regarding the mechanism of choosing the commissioners, its composition and so on are still under discussion,” Harry said. According to the draft bill, the board will consist of seven members, with the Finance Ministry and central bank each supplying one.

The OJK is supposed to take supervisory function over banks from Bank Indonesia and take control of the Capital Market and Financial Institution Supervisory Board (Bapepam-LK), which not only regulates securities markets but also non-banking financial institutions such as insurance firms, pension funds and brokerages. Bapepam would be separated from the Finance Ministry and put under the OJK.

The need for such a superbody was spurred by the 1997-98 Asian financial crisis, with the aim of preventing another banking meltdown.

The idea to establish the OJK came in 2004 when lawmakers saw flaws in the ability of Bank Indonesia to monitor the country’s hundreds of commercial banks.

The 2004 central bank law said the authority had to be established by Dec. 31 this year, but the drafting of the law has been slow as Bank Indonesia, keen to retain the power to oversee the nation’s banks, has said the stability of the financial system may be put at risk. The government finally submitted the bill on June 12.

One issue seen as a spur to efforts to push the bill through was the row over the state bailout of Bank Century to the tune of Rp 6.7 trillion ($745 million) in 2008, which was blamed on mismanagement and poor oversight by the central bank.

Business is putting high hopes on the OJK to help improve the banking system, particularly the performance of local banks.

Speaking on Thursday, James Riady, vice chairman of Lippo Group, to which the Jakarta Globe is affiliated, said better supervision by the OJK would help reassure customers.

“The problem with local banks is trust. They cannot compete with foreign banks that come here bringing their hundreds of years of history,” James said. “Once trust can be ensured, local banks should not worry about competition, because each bank has its own niche.”

Although the central bank’s board of governors has not formally challenged the formation of the OJK, statements by its senior officials showed their clear reticence in handing over part of their supervisory authority.

Opponents of the OJK said it would be so powerful that it could put the financial and economic systems at risk if a wrong political decision was taken in the financial sector. They also argued that in other countries, the central banks control all commercial banks while the finance ministries all non-banking financial systems.

“The banking industry is a bit cautious of the OJK. With all its weaknesses, the central bank is performing better supervision now than 11 years ago. And we still don’t know the details of the OJK,” said Fauzi Ichsan, an economist at Standard Chartered in Jakarta.

Harry said that next year, after the OJK’s board of commissioners had been established, it would be tasked to work on the supervision transition process. It would be financed from the state budget based on standard practice in the financial sector, he said.

“The OJK will propose their budget in the state budget. They can also take premiums from financial industries, but this will require House approval,” Harry said. He added that the premiums levied by OJK would go to the state budget as government revenue.

Additional reporting by Reuters

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