Bank examiners

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.