Improving bank supervision<\/p>\n
It is encouraging to note that amid the political battle to
\ntake control of Bank Indonesia (central bank), both the
\ngovernment and the House of Representatives remain fully aware of
\nthe vital importance of effective supervision in preventing a
\nfinancial crisis. Bank Indonesia's deputy governor Achjar Iljas
\nconfirmed over the weekend that an integrated financial
\nsupervision agency would be set up sooner than the December, 2002
\ndeadline, as stipulated in the 1999 Central Bank Law.<\/p>\n
Though the feasibility of the new schedule for establishing
\nsuch an important institution is still debatable as a new law has
\nyet to be enacted to become the legal foundation of its
\noperations, the drafting of the required legislation would be
\nbetter started right now so as to coincide with the proposed
\namendments of the central bank law.<\/p>\n
The need for an independent financial supervision agency that
\nis free from political intervention had, in fact, been felt
\nimmediately after the financial crisis in late 1997 as analyses
\nthen strongly confirmed that weak, ineffective supervision by the
\ncentral bank was one of the main reasons of the banking crisis.
\nAs the audit of the multi-billion dollar in emergency liquidity
\nsupport poured into ailing banks during the peak of the crisis in
\n1998 and early 1999 has found out, the central bank was mostly in
\nthe dark about which of the banks were simply illiquid and which
\nwere already insolvent. No wonder, quite a portion of the
\nliquidity loans has not adequately been covered by collateral and
\nmay not be recovered at all.<\/p>\n
Part of the problem was resolved in May, 1999 by the enactment
\nof the central bank law that grants political independence to
\nBank Indonesia. But since establishing a completely new,
\nindependent supervision agency from scratch takes a lot of time
\nand requires a new law, bank supervision remains under the
\nauthority of Bank Indonesia. However, two articles of the central
\nbank law stipulate that bank supervision shall be integrated into
\nan independent financial supervision agency that is separate from
\nBank Indonesia. This new supervision agency, which will also be
\ncharged with overseeing non-bank financial institutions, such as
\nleasing and insurance companies and pension funds, will have to
\nbe set up by the end of 2002 at the latest.<\/p>\n
Drafting the law on an integrated financial supervision agency
\nalong with the amendments of the 1999 central bank law will
\nprevent duplication or overlapping authority between Bank
\nIndonesia and the new agency, especially with regard to the
\nregulatory function of the banking industry. Even though the
\ncentral bank law calls for the separation of banking supervision
\nfrom Bank Indonesia, the legislation still stipulates that the
\ncentral bank will retain the regulatory and guidance function in
\nthe banking industry. This provision, if retained, may become a
\nsource of dispute in the future between the central bank and the
\nnew supervision agency.<\/p>\n
But of most importance in the preparations for the new
\nfinancial supervision agency is to ensure that the law on the new
\ninstitution should guarantee its independence from undue
\npolitical influence in the exercise of its mandate, especially
\nconcerning its decisions with regard to individual financial
\ninstitutions, the areas of licensing, closure and liquidation.<\/p>\n
However, the law on the new financial supervision agency
\nshould avoid the shortcomings of the 1999 central bank law that
\nvirtually vests Bank Indonesia with absolute power because the
\nprovisions on its independence are not supplemented with clear
\nrules on accountability and performance standards.<\/p>\n
Moreover, an effective financial supervision system needs to
\nbe sufficiently transparent so that supervisors can be seen to be
\nexercising their power in a way which is beneficial to the
\nobjectives of maintaining a stable and sound financial system,
\nand that their performance can be monitored by the government,
\nthe supervised institutions and the public at large. To ensure
\nthe accountability of supervisors, the shareholders or directors
\nof supervised institutions should also be provided with a legal
\nrecourse to appeal against the actions or decisions of the
\nsupervisors.<\/p>\n
As the central bank, which is now still in charge of
\nsupervising banks pending the establishment of the new integrated
\nfinancial supervision agency, is already independent and
\nadequately competent, there is actually no urgency in hastening
\nthe setting up of the new agency. Most important is that the
\nlegislative foundation of the new financial supervision
\ninstitution and its staffing and resources should be prepared
\nthoroughly.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/improving-bank-supervision-1447893297",
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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