The central bank has sent another signal of its reluctance to surrender its oversight of the banking sector.
The comments by acting Bank Indonesia Governor Darmin Nasution came ahead of a House of Representatives session on Monday to debate a draft bill to create the Financial Services Authority to take over regulation of lenders, capital markets and non-banking financial institutions.
“The central bank must have prudential monitoring [over the banking system] not just of the macro level but the micro level as well,” he told a seminar on Thursday, referring to the view that close supervision is crucial to ensure the health of individual lenders.
“I believe a balanced approach to supervision of compliance and risk prevention needs to be under one roof. Most central banks around the world are involved in micro supervision because they have the data and the most effective instruments to follow developments in the financial sector.”
The central bank’s board of governors, however, has not formally challenged the formation of the authority, also known as the OJK.
“In principal we agree on the establishment of the OJK but we should discuss the technicalities,” Darmin said.
The superbody also would take control of the Capital Market and Financial Institution Supervisory Board (Bapepam), which not only regulates securities markets but also non-banking financial institutions such as insurance firms, pension funds and brokerages.
Bapepam would be separated from the Finance Ministry and fall directly under the OJK. Darmin has argued that with so much on its plate, the OJK would not be able to respond quickly enough to contain a banking crisis.
Spurred by the 1997-98 Asian financial crisis, a 2004 law mandated the creation of the OJK to prevent another banking meltdown. The deadline for the body’s establishment is Dec. 31, and the government submitted the draft bill on June 12.
Sigit Pramono, chairman of the Indonesia Banks Association (Perbanas), reiterated on Thursday that most banks wanted supervision to remain in the central bank’s hands.
“First, it’s because we do not have to pay any fees for BI supervision,” he said.
“Second and more importantly, we are concerned about the risk of another crisis during the transition period. If this happens, the response could be delayed because [BI and OJK] could blame each other and not take responsibility.”
Bapepam has said the OJK would cover its operational costs by charging the financial institutions it regulates a fee that would not exceed the 0.2 percent the Deposit Insurance Agency levies on third-party funds.
The government has argued that the central bank would not be completely surrendering its oversight. Fuad Rahmany, head of Bapepam and chairman of the committee that drafted the bill, said that according to the legislation, the OJK and BI would be sharing information. “BI can still look after lenders,” he said.
Jos Luhukay, vice president director of PT Bank Danamon, said the government and the central bank would better direct their energies to establishing processes for supervision, rather than arguing over authority.
“I think that if we focus on the organization and structure we cannot move forward,” he said. “But if we can make firm processes and information sharing, the organizational structure will not be that important. However, the OJK is required by law, and an OJK without bank supervision is no better than no OJK at all.”
Jos also proposed a two-step handover to ease the transition. “Maybe we should consider setting up the OJK in two phases, first for non-banking supervision, then banking supervision.”
Sohibul Iman, deputy chairman of House Commission XI overseeing finance, said legislators were well aware of banking supervision issues but would welcome suggestions. “We are open to input from everyone about forming an OJK that’s best for Indonesia,” he said.
“Our concern is time, as the deadline is approaching. If we can’t finish on time, we have three options: Amend the BI law, the government issues a regulation in lieu of law on the OJK or we ask for the Constitutional Court’s opinion,” Sohibul said.