Indonesia Approves New Regulator to Oversee Banks

Jakarta Globe, Aditya Suharmoko, October 27, 2011

Bank Indonesia Governor Darmin Nasution. Indonesia’s House of
Representatives on Thursday approved a long-delayed bill creating
a new regulator to oversee a growing financial industry in Southeast
Asia’s largest economy, part of global efforts to ward off future bank
collapses. (Antara Photo) 

       

elated articles

• While Most Companies Are On a Roll, Some Hit a Rock 10:30pm Oct 26, 2011
• Indonesia on Right Track for Growth, ‘Dr. Doom’ Says 1:28am Oct 25, 2011
• ‘Dr. Doom’ Stays Bullish on Indonesia’s Economy 10:59pm Oct 24, 2011
• Demand From Eager Retail Investors Doubles the Size of Govt Bond Offer 10:45pm Oct 24, 2011
• New Regulatory Body to Be Formed to Supervise Indonesian Banking Sector 10:51pm Oct 21, 2011

Indonesia’s House of Representatives on Thursday approved a long-delayed bill creating a new regulator to oversee a growing financial industry in Southeast Asia’s largest economy, part of global efforts to ward off future bank collapses.

The new regulator, to be known as the OJK, will take over the supervision of banks, brokerages and insurance firms from the central bank and capital market watchdog Bapepam-LK starting from 2013.

OJK, or Otoritas Jasa Keuangan, translates into Financial Services Authority and is modeled after UK’s FSA.

The move to create the OJK came about to avoid a repeat of the 1997/98 financial crisis which resulted in the collapse of many Indonesian banks.

Analysts say Bank Indonesia has improved banking supervision in recent years, and some were skeptical whether the OJK could do a better job at a time of global economic uncertainty caused by the festering euro zone and US debt crisis. 

“The banking sector is confused on why the OJK should be founded because Bank Indonesia’s supervision is good ... Our banks have the strongest financial indicators in Southeast Asia due to Bank Indonesia’s role,” said Juniman, an economist at Bank Internasional Indonesia (BII) in Jakarta. “This is a political decision.”

In the 2008 credit crisis, Indonesia’s banks were well capitalized and mostly escaped unscathed, though the government bailed out one small lender over fraud, creating a political storm that later brought down the then-finance minister.

Indonesia is currently the only emerging market in Asia with almost no ownership limits on banks. It is one of Asia’s most fragmented banking markets, and foreign lenders control about a quarter of the country’s outstanding loans.

The bill creating the OJK was meant to be approved last year, but lawmakers had been wrangling over the composition of its nine-member board of commissioners.

They agreed last week that one board seat will be allocated for both the central bank and the finance ministry, while seven other seats require parliamentary approval, according to the draft of the bill.

The commissioners, who will have a five-year term, should not hold other posts in financial institutions or political parties to ensure independency, according to a draft of the bill seen by Reuters.

“The OJK is outside the government, which means the OJK is not under the government’s authority,” finance minister Agus Martowardojo told the House in a speech on Thursday.

The bill stipulates the creation of a forum to manage a crisis, whose members would include the finance minister, the central bank governor and OJK’s head of commissioners.

Bank Indonesia has been reluctant to relinquish its supervisory role over commercial banks on fears this will reduce its effectiveness in policy making, especially at times of crisis.

“What’s important is for the supervision of systemically important banks -- if possible we won’t need to ask for permission from the OJK to do this,” said central bank spokesman Difi A. Johansyah.  

The OJK will also be responsible for grant banking licenses, currently authorized by the central bank, according to the draft. Indonesia’s central bank has temporarily barred takeovers in the banking sector, citing upcoming ownership rules, which sowed uncertainty about the regulatory environment and has already scuttled some cross-border deals.

Reuters