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.