Supervising financial services<\/p>\n
The Manila-based Asian Development Bank (ADB) threw its weight
\nbehind the Indonesian government's initiative to establish an
\nindependent financial service supervisory authority (FSSA),
\nasserting on Tuesday that the size of its future loan
\ndisbursements to the country would depend on the setting up of an
\noversight body that was separate from Bank Indonesia (the central
\nbank).<\/p>\n
ADB principal financial sector specialist Michael Ryan said
\nhere that Indonesia might need a larger sum of loans from the ADB
\nto cover its fiscal gap after the termination of its program with
\nthe International Monetary Fund later this year. But he cautioned
\nthat any increase in ADB lending would be contingent upon the
\nintegration of the supervision of banks and other financial
\nintermediaries into a single, independent authority.<\/p>\n
The plan to set up FSSA dates back to the 1999 Central Bank
\nAct which, among other things, gave Bank Indonesia political
\nindependence but at the same time required the hiving off of bank
\nsupervision from the central bank to FSSA by Dec. 31, 2002, at
\nthe latest.<\/p>\n
But the plan was delayed for political and economic reasons
\nand due to resistance from the central bank. The supervision of
\nfinancial intermediaries now remains the responsibility of
\nseparate institutions. The central bank is in charge of
\nsupervising banks, the finance ministry oversees nonbank
\nfinancial institutions and the Capital Market Supervisory Agency
\nis responsible for supervising securities companies.<\/p>\n
President Megawati Soekarnoputri recently proposed to the
\nHouse of Representatives a bill on FSSA establishment,
\nrecommending that deliberations on the draft legislation be given
\nhigh priority. However, the central bank has lobbied the House to
\npostpone enactment of the bill, arguing that FSSA establishment
\nwould be feasible only within the next five to 10 years in view
\nof severe funding restrictions.<\/p>\n
Most countries have traditionally considered it ideal to place
\nbanking supervision under the umbrella of central banks because
\nthis function is key to the conduct of monetary policy and
\nfinancial stability oversight. After all, wherever bank
\nsupervisors are physically located they must work closely with
\nthe central bank to manage systemic stability in the financial
\nsystem.<\/p>\n
Moreover, achievement of the central bank's macro objectives
\nof maintaining monetary and price stability is still dependent
\nupon the maintenance of micro-level financial stability in the
\npayments and banking systems, and the smooth working of the whole
\nfinancial system.<\/p>\n
There has, nevertheless, been a recent trend toward the hiving
\noff of banking supervision to a separate agency, as Britain,
\nJapan, South Korea, Australia and several other European
\ncountries have done.<\/p>\n
Supporters of this tendency argue that the dividing lines
\nbetween differing kinds of financial institutions become
\nincreasingly fuzzy and the continuation of banking supervision by
\nthe central bank threatens inefficient overlap between
\nsupervisory bodies.<\/p>\n
But insofar as Indonesia is concerned, the demand for shifting
\nbank supervision away from Bank Indonesia has been prompted by
\nthe perception that incompetence and a corrupt mentality within
\nthe central bank's banking supervision department was largely
\nresponsible for the banking crisis in 1997 and 1998.<\/p>\n
Witness how the government and the central bank have been in
\ndispute since 1999 over how to share the losses incurred by the
\nmassive injection of Rp 144 trillion (US$17.5 billion) in
\nliquidity support into the banking system by the central bank
\nduring the height of the crisis.<\/p>\n
This trauma should have greatly influenced the government and
\nHouse members to insert a special stipulation into the 1999
\nCentral Bank Act calling for the integration of the supervision
\nof all financial intermediaries into a single, independent
\nauthority.<\/p>\n
Moreover, as the law has provided the central bank political
\nindependence, lawmakers at that time seemed to be concerned that
\nthe concentration of operational independence in monetary policy
\nand supervisory authority in the hands of the central bank, not
\nonly would make the nonelected body too powerful, but could also
\ncause conflicts of interest.<\/p>\n
Whatever the benefits of integrating the supervision of all
\nfinancial intermediaries -- in fact, there are very few case
\nstudies on which to draw a final conclusion -- the government
\nneeds to tread very carefully in setting up the FSSA.<\/p>\n
Funding is not the only issue here. The transfer and
\nintegration of thousands of personnel from dozens of departments
\nat the central bank, finance ministry and Capital Market
\nSupervisory Agency, currently in charge of separately supervising
\nbanks, nonbank financial companies and securities firms into a
\nsingle body, is a very complex process.<\/p>\n
Since the bill on the amendments to the 1999 Central Bank Act
\nis designed also to reinstate the central bank's role as the
\nlender of last resort, it is vital that the flow of information
\nbetween bank supervisors and the central bank remains smooth and
\neffective, however the FSSA may be organized and structured.
\nAfter all, the transmission mechanism of monetary policy flows
\nmainly through financial intermediation within the banking
\nsystem.<\/p>\n
Thorough preparations are needed and, we think, there is not
\nmuch urgency to set up the FSSA this year. A poorly designed,
\ninadequately structured FSSA could, instead, endanger the
\nfinancial service industry, which is still fragile.<\/p>\n
Despite its notorious reputation as a \"den of thieves\" before
\n1999, the technical competence and integrity of Bank Indonesia's
\nbanking supervision department have improved greatly since it
\ngained political independence by virtue of the 1999 Central Bank
\nAct.<\/p>\n
It would be best for the government and the House to
\ndeliberate the bill on FSSA together with the bill on amendments
\nto the 1999 Central Bank Act and the bill -- yet to be proposed
\nto the House -- regarding the establishment of a financial safety
\nnet (deposit insurance scheme) to replace the current blanket
\nguarantee.<\/p>",
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"sponsor": "Okusi Associates",
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