Bank examiners

Bank Indonesia, already under sharp criticism by many analysts for what they call its stop-and-go and often discriminatory measures in handling troubled banks, is coping with another problem in its backyard -- possible crooks among its own staff.

But unlike the Rp 7 billion (US$2.9 million) scam allegedly committed by the chief of its treasury section last August (with the case currently being tried in Jakarta), the latest scandal, if it turns out to be extensive, could affect the public's trust in the central bank's role as guardian of the country's banking system.

The scandal could cause much wider repercussions because it allegedly involved the central bank's supervision department. Three bank examiners, who have been removed from their positions, are strongly suspected of colluding with executives of several private national banks they audited. Predictably, the collusion aimed at influencing the conclusions of the examiners' assessments, which resulted in some unsound banks being classified as sound.

Bank Indonesia Governor Soedradjad Djiwandono understandably refused to answer reporters' questions about the reported scandal, as his internal auditors are still investigating the suspects. Premature disclosure of the case, especially if investigations have yet to be completed, could cause unnecessary worry or even panic.

The crux of the matter is that prudential regulations, however good they may be, are not very effective without the support of able and honest supervisors of the central bank.

In fact, the quality of supervision by the central bank is crucial for maintaining a sound and efficient banking system. So vital is the role of bank examiners that in many countries bank supervisors are granted strong institutional and professional authority to carry out their duties free from political interference. They are empowered to ensure that banks are managed in a prudent manner by fit and proper managers and owners, and that deviations from sound banking practices are promptly corrected.

On the other hand, though, bank supervisors, invested with so much power, often face big temptations from bank owners or managers. Corruptible supervisors could, for example, be compromised into regulatory forbearance, allowing banks to continue operating despite noncompliance with regulations in the hope that the bank's problems would go away with time.

The suspected scandal in Bank Indonesia's supervision department is a case in point. It allegedly involved the bribing of several examiners into classifying problem banks into sound ones.

We still believe that the suspected collusion between several central bank supervisors or examiners and commercial bank executives is an isolated case and not the tip of an iceberg. Nonetheless, thorough investigations are warranted. The central bank should get to the root of the problem, looking into the possibility of other examiners being involved in like practices. All banks already examined by the suspected supervisors should be reaudited. But the latest scandal should also force Bank Indonesia to reexamine the supervisory mechanism of its bank examiners. This is especially true considering the increase in banks and bank branches over the last 10 years has far outstripped the capacity of the central bank's supervision department.