IMF warns of new bank regulator
IMF warns of new bank regulator
Berni K. Moestafa, The Jakarta Post, Jakarta
Creating a new financial regulator is by no means a simple
task. And a new entity in the making shows the potential for
dragging the banking sector through a detour in its road to
recovery, according to one study by the International Monetary
Fund (IMF).
The Financial Sector Supervisory Institution (FSSI), as it is
called, will oversee the banking, securities, and insurance
sectors under a role now held by various regulators.
The FSSI is expected to streamline regulation of the financial
sector, with the government hoping to have it up and running by
the end of this year.
But getting there would put banks through new risks that are
part of the change process, according to the IMF.
"Any change process involves risks, and the greater the
proposed structural change the greater the risk," the IMF said in
a paper issued in 2000 that examined the pro and cons of unifying
financial sector supervision.
For Indonesia, the transition period could plunge banks into
new uncertainties at a time many are still struggling to overcome
the impact of the late '90s financial crisis.
"The change process may result in a serious reduction in
existing regulatory capacity unless it is well-managed," the
paper said.
"This is likely to be of particular concern in transitional or
developing economies, where regulatory capacity may, in any case,
already be relatively weak."
The paper said that in developing countries, where most
financial sectors were centralized on banks, ample steps should
be taken to assure banking supervision would not be compromised.
The local banking sector makes up about 80 percent of its
financial sector, according to government estimates.
Any weakening in banking supervision would expose banks to
added risk, as the threat of bank failure still remain high four
years after the government bailed out the sector.
This has led Bank Indonesia to continue to retain 14 of the
country's largest banks on its intensive-watch list, which
normally is reserved for deeply troubled banks.
Bank Indonesia supervises bank operations as part of
maintaining financial stability, but will lose that authority
once the FSSI takes charge.
Subsequently, Bank Indonesia was the first to air concern over
the FSSI, which, due to its crucial role in the financial sector,
central bank officials charged as too dubious.
They warned that a lack of coordination between the two bodies
could slow the response time in the event another banking crisis
loomed.
It is unclear how the FSSI will coordinate, within the
financial sector, its role with that which Bank Indonesia has on
the monetary sector. Legislators have yet to produce an FSSI law.
"In any case, the benefits of change should be relatively
clear and unambiguous before embarking on a proposed
unification," the IMF's paper said.
The government said that one benefit of a unified supervision
was to better control the operations of financial conglomerates.
Although many of the local ones have lost their ownership in
banks as a result of the economic crisis, many have maintained
interests across a number of firms that are being supervised by
different regulators.
"Experience has shown that, while these firms generally claim
to have financial "fire walls" between their various operations,
they often prove to be illusory when serious difficulties arise,"
the IMF's paper explained.
Another benefit, it said, was in developing rules that were
more flexible than could be achieved with separate regulating
agencies.
"Whereas the effectiveness of a system of separate agencies
can be impeded by turf wars or a desire to pass the buck, these
problems can be more easily limited and controlled in a unified
regulatory organization," it said.
But it added that if the benefits of unification were not
clear or the cost too high, more modest institutional changes
might suffice.
These, it said, could range from the formation of a unified
oversight board to shared facilities with the central bank.