Jumat, 04 April 2014

A conspiracy to overthrow RI’s Financial Services Authority

A conspiracy to overthrow

RI’s Financial Services Authority

Harry Pattikawa  ;   A credit risk portfolio analyst
at DHB Bank in Rotterdam, the Netherlands
JAKARTA POST, 03 April 2014
Indonesia’s Financial Services Authority (OJK) is apparently being undermined by various parties, which could cause it to lose its supervisory effectiveness before reaching institutional maturity. Regrettably, pressure on the OJK is coming from several different points simultaneously, making it look like an organized conspiracy.

An NGO calling itself the National Economic Sovereignty Defense Team (TPKEB) has submitted a judicial review request to the Constitutional Court to test whether the 2011 OJK Law contravenes the 1945 Constitution. The NGO is demanding that the court temporarily relieve the OJK of its duties.

The National Banks Association (Perbanas) and the Indonesian Listed Companies Association (AEI) have questioned the fees imposed by the OJK on financial services companies. For better or worse, the blunt fact is that the OJK has been established.

A number of empirical research studies undertaken by academics support the thesis that central banks that operate without assuming banking supervisory responsibilities have a better inflationary track record. Another empirical study undertaken by Carmine Di Noia and Giorgio Di Giorgio (C&G) in 1999 showed that average inflation in OECD countries doubled in those countries where a central bank had a monopoly on bank supervision.

Research carried out by R. Heller in 1991, which looked at 16 countries, found that independent central banks were “better in attaining the goals of price stability” and that they also did not occupy a growing niche to have supervisory responsibilities. Heller’s opinion is shared by Charles Goodhart in his book entitled The Central Bank and the Financial System.

Furthermore, C&G noticed that in countries whose central banks had a monopolist position in banking supervision, such as Ireland, Italy, the Netherlands, Spain and the United Kingdom, banks had the power to reduce (mark down) interest below the risk free rate. In other words, banks were able to exploit their customers. In 2009, the countries mentioned suffered from bank crises, especially Ireland and Spain.

A reintegration of banking supervision into Bank Indonesia’s (BI) tasks would have several negative impacts on the whole system.

First is a conflict of interest. If a central bank with a monopolist position in banking supervision raises interest rates in its mission to create stable prices, the policy would cause banks that depend on low interest rates to suffer losses. This, in turn, would result in many banks facing severe problems.

Second, the combination of functions might also lead to expectations on the part of the private sector that the central bank might be influenced by considerations of financial system stability when determining monetary policy.

Being too closely involved in the crises suffered by banks under its control may also hurt the central bank’s global credibility, as well as having a negative affect on its ability to control inflation.

Third, central banks’ macroeconomic policies are supposed to be counter-cyclical, while a banking supervisor adopts a pro-cyclical approach.

Therefore, if one institution has to implement both approaches, the two may collide. For example, at a time of crisis, a banking supervisor usually asks banks not to lend more. At the same time, the monetary authority — usually governed by political considerations — plows more credit into the economy.

Fourth, there can be a substantial trade-off if an insolvent bank has to be closed but at the same time it has previously borrowed from the central bank with collateral whose value has since drastically decreased.

The question then arises as to whether the central bank would take action, as it could cause potentially huge losses to the central bank’s balance sheet. So, the central bank may delay taking action in an attempt to avoid any losses. As a result, in my view, the banking system contains weak banks. This situation then becomes a time bomb for the whole financial system.

There are a number of empirical studies that adopt the opposite argument and say there are advantages if a central bank is also charged with supervising banks; such advantages include data access to the financial system and speedy decision-making in times of crisis. A central bank then has overall insight to the entire economy when carrying out its macro-prudential duties. However, these advantages can still be gained by way of strong collaboration and information sharing.

A separation of a central bank and banking supervisor is the best alternative. The evolution of the financial industry, especially regarding moral hazards and accountability, suggests that such a separation is far superior.

Accountability means that there is clarification on who is actually paying for the cost of monetary policy and banking supervision.

I believe in the context of Indonesia, the central bank would be deliberating too much with the banks. Moreover, in those countries where central banks also supervise banks, the position of banking customers are weak as the bankers can mark down the interest rate below the risk-free rate. Therefore, a central bank with a monopolist position is not a good role model.

The objections of the groups opposing the establishment of the OJK do not consider wider interests. The public puts its savings into banks mostly due to the stamp of trust issued by the authority in charge. The allegation about inequality is also unethical in my view.

If a soybean company collapses, nobody cares, including the media, as hundreds of new entrepreneurs will emerge.

But if a financial institution collapses, the ramifications on the entire system are huge.

The OJK will be able to quickly develop its operational integrity with full support from the government and financial services companies.

The problem is, however, that the OJK’s employees who have been transferred from BI’s bank supervision division can choose to return to BI. The budget used for these employees is also BI’s budget. This kind of employment structure does not foster a sense of belonging to the OJK.

These employees effectively have two employers, and that can interfere with their work performance.

Ideally, BI should be willing to permanently give up its banking supervisory role to the OJK.

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