Central bank law amended<\/p>\n
The turbulent political process to amend the 1999 Bank
\nIndonesia Act -- amendments that were proposed by the government
\nin late 2000 -- finally ended last week after the House of
\nRepresentatives, the finance ministry and the central bank
\nreached a compromise on the most contentious provisions.<\/p>\n
The finance ministry's proposal for setting up a supervisory
\nbody for the central bank was accommodated in the amendments --
\nwithout compromising the basic principle of political
\nindependence for Bank Indonesia.<\/p>\n
The central bank's political independence should indeed be
\nnonnegotiable, as interfering with this principle will go against
\nthe 1945 Constitution. The final amendments allow for the setting
\nup of a supervisory body which is tasked only to enhance good
\ngovernance at the central bank.<\/p>\n
The supervisory body, therefore, will be only authorized to
\noversee how the central bank manages its assets, budget and
\ninvestment.<\/p>\n
The central bank's monetary management remains fully
\nindependent of any government interference, either from the
\nexecutive or legislative branch. This independence is also
\nsupported by the secured tenure of its board of governors and
\nadequate financial resources to fund its operations.<\/p>\n
An independent central bank is especially vital, particularly
\nin view of the 2004 electoral period, when the incumbent
\ngovernment will be faced with great temptations to introduce
\npopulist measures and distribute political goodies in a concerted
\nbid to gain voter support, at the expense of the long-term good
\nof the economy.<\/p>\n
The amendments also uphold the authority of bank supervision
\nat the central bank until 2010 at the latest to allow for
\nadequate preparations to establish a single supervisory authority
\nfor banks and other financial service institutions, including the
\nstock market.<\/p>\n
Forcing the establishment of such an integrated supervisory
\nagency within the next two to three years as proposed by the
\nfinance ministry could cause instability in the financial service
\nindustry, especially as most banks have yet to fully recover from
\nthe combined impacts of the 1997-1998 crises.<\/p>\n
Certainly, as a consequence of this policy, the amendments
\nfurther strengthen the function of the central bank as a lender
\nof the last resort. As the central bank is fully in charge of
\nsupervising banks, it is also the most competent to decide which
\nbank is eligible to receive emergency liquidity loans and which
\nshould be closed for insolvency.<\/p>\n
Integrating the supervisory authority of financial services
\nthat is now spread among the finance ministry, Bank Indonesia and
\nthe stock market watchdog isn't a simple process. It requires a
\nlot of training, reorganization and establishment of standard
\nworking procedures and the formulation of new rules.<\/p>\n
An adequate supervisory capability is a basic element of the
\nfinancial safety net being prepared jointly by the government and
\nthe central bank. Other fundamental components are the lender of
\nlast resort and deposit insurance scheme.<\/p>\n
The amended law mandates the finance ministry and central bank
\nto prepare a bill jointly on the broad framework of a financial
\nsafety net and another draft legislation on which a deposit
\ninsurance scheme and agency will be established.<\/p>\n
The deposit insurance scheme will replace the blanket
\nguarantee on bank deposits and claims that have been responsible
\nin part for the public's trust in banks, but which, at the same
\ntime, have caused major contingent liabilities on the government.<\/p>\n
Postponing the phasing out of the blanket guarantee until
\nafter the presidential election next year is quite a wise move,
\ngiven the as yet fragile condition of the banking industry and
\nthe political turbulence the nation is about to undergo during
\nthe 2004 electoral period.<\/p>\n
The final version of the amendments that were approved by the
\nHouse certainly did not satisfy all parties; yet they seemed the
\nbest political compromise to cap a turbulent three-year
\ndeliberation process.<\/p>\n
Most important is that the amendments do not erode the
\npolitical independence of the central bank, but at the same time,
\nthey require it to perform at higher standards of accountability.<\/p>\n
_________<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/central-bank-law-amended-1447893297", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }