House approves amendment to central bank law
House approves amendment to central bank law
The Jakarta Post, Jakarta
The House of Representatives endorsed on Friday the amendment
of the central bank law, which will require the establishment of
a financial sector safety system in 2004, in addition to other
items.
The enactment of the new law, replacing the existing Law No.
23/1999 on Bank Indonesia, ends a lengthy deliberation process
that started more than three years ago. The deliberation was
conducted by a special team of lawmakers with representatives
from the Ministry of Finance and Bank Indonesia.
Darmin Nasution, Director General for Financial Institutions
at the ministry, said the new law gave a mandate to the central
bank and the Ministry of Finance to draft a law on a financial
safety net (FSN), which is expected to be completed at the latest
by February before submitting it to the House for deliberation.
"Hopefully, we can complete it on schedule, so that the FSN
could be established by the end of the year (2004)," Darmin told
reporters.
The FSN is a concept aimed at equipping the country in dealing
with certain situations that could lead to a systematic collapse
in the country's financial sector, most notably the banking
sector -- similar to the one experienced by the local banks
during the 1997-1998 financial crisis.
"If a bank faces a problem that threatens our financial sector
stability, then Bank Indonesia can provide a sort of emergency
funds guaranteed by the government.
"But, how are the decision-making mechanism, the bail-out
funds limitation as well as the funding scheme to be determined
on the FSN law?," Darmin said.
Minister of Finance Boediono has said that the concept was
aimed at helping prevent the recurrence of a financial mess
similar to 1997.
He said FSN was needed to show that Indonesia had learnt the
lesson from the crisis, which even to this point -- six years
after Bank Indonesia injected several billion dollars worth of
rescue funds under its liquidity support loan (BLBI) facility
into the system -- there are still many things left unsettled
which have led to various comments questioning the validity of
such an effort.
The FSN system will be in line with other related measures;
including the creation of a deposit insurance agency,
establishment of a lender-of-last-resort facility at Bank
Indonesia (already stipulated under the new central bank law),
and the planned financial services authority (OJK).
The deposit insurance agency will take over the current task
of the Indonesian Bank Restructuring Agency (IBRA) as the
executor of the government's blanket guarantee scheme, whose
mandate is set to expire in February. Darmin said the draft on
the deposit insurance agency could be submitted to the House in
January for deliberation, and he hoped it could be concluded by
March.
Another crucial change in the central bank law was the
establishment of a supervisory body within Bank Indonesia, one of
the clauses that was responsible for the drawn out process in the
deliberation of the law.
The body will be tasked with overseeing the management of Bank
Indonesia's assets, its budget and its investments. But it would
not be allowed to intervene in the operational functions of the
central bank's board of governors, particularly in the area of
monetary policy and banking supervision.
Key points of new central bank law:
1. The establishment of a supervisory body within Bank Indonesia.
The members will be proposed by the president, which will then be
selected by the House of Representatives. The body can consist of
as many as five members.
2. Board of governors. BI can propose to the president between 4
to 8 professionals for each position from both inside and outside
the central bank. The president will select up to 3 candidates to
later be submitted and processed by the House of Representatives.
3. Establishment of the OJK by 2010 at the latest. In the
meantime, Bank Indonesia will remain as the lender of the last
resort for the banking sector.