A Bridge Too Far; The Strive to Establish A Financial Service - PowerPoint PPT Presentation

Indonesia InternationalBanking Convention 2012 JW Mariott, Jakarta 16 February 2012 A Bridge Too Far; The Strive to Establish A Financial Service Regulatory Authority in Indonesia

The Structure of Financial Supervision (Pre-OJK) Legislative Presiden assembly Bank of Indonesia Ministry of Ministry of (Jakarta + 41 Cooperative Trade Ministry of Finance (Jakarta + regional offices) 399 District) Bapepam LK (only in Jakarta) Banks dan Rural Cooperative- Bank [2003 firms] Stock Market and based financial Futures (Jakarta + 41 ) Non-Banking institutions Market Institutions (1670 (78,035 firms) firms) 2

The Structure of Financial Supervision POSt-OJK Legislative assembly Presiden Bank of ?? Indonesia OJK Ministry of Ministry of (Jakarta + 41 Cooperative Trade regional (Jakarta + 399 offices) District) Micro Prudential Stock Market and Non- Cooperative- Macro Banking Institutions (1670 based financial Prudential firms), Banks dan Rural Bank institutions Futures [2003 firms] (78,035 firms) Market 3

Post OJK The Existing Supervision Bank OJK Indonesia Bapepam-LK (market conduct) Bank Indonesia Micro Macro Ministry of (Micro Prudential Cooperative Prudential Prudential Macro Prudential (Cooperative Aspects) Business Conduct) Coordination between Business Financial BI and OJK is Institutions Conduct paramount, however coordination is ‘expensive’ in 4 Indonesia

Asymmetric Information Problems Bank Bank of Bank of Bank Indonesia Indonesia • Two different • Two different supervisors but no supervisors but no data sharing and data sharing and Invest House hold data interfacing data interfacing ors • Potential crime is • Potential crime paramount is paramount Bapepam- Emiten The Cooperative LK Ministry of KUKM 5

Example of Problems in Microfinance Mrs X had borrowed money from • BMT X was very aggressive in marketing its • money lender who act as cooperative products and opened its office in an Rp3 million. After the 5 th month, she elementary school cannot afford to pay the installment. Pupils and staff of five elementary schools • Few months later, her loan became • became its customers, and they saved their Rp11 million as she has to pay: money in the BMT and worthed Rp8 billion. – Interest rate Then, the BMT collapsed and the customers • – Fee for belated payment were panic and they consulted the regulators: – Fee for penalty (between 1-5x – BI: the BMT is not a bank or BPR (rural interest rate) bank) – Fee for debt collector (Rp1,5 million/visit) – Bapepam: the BMT is not their supervisee. • In her case the debt collector visited her house twice and she – The Ministry of KUKM: the BMT is has to pay for it. their supervisee, but the customer money was not guaranteed by LPS (IDIC) 6

• About 2/3 of the Act focuses on the mechanism to establish a new financial service Coordination regulatory authority • Little attempt has been made to discuss about Central monitoring and supervision in the Draft Act OJK Bank • The members of board of commission would be chosen by parliament. Micro Macro • 7 independence members Prudential Prudential • 2 ex officio from Bank of Indonesia and the Ministry of Finance Business Monetary • In the first three years, OJK will be financed Conduct Policy by the GOI • In subsequent years, OJK will be financed by financial institutions as they have to pay annual fee to OJK. 7

Would OJK be financed by supervisees? • According to the Act, in the first 3 years, OJK will be financed by the GOI Rivalness Non-Rivalness • Subsequently, OJK will be financed by Excludable Private Goods Natural supervisees in the financial sector Monopoly • What is the supervision fee for OJK? Is Non Excludable Common Public Goods it a tax or a retribution? Resources • If the fee is a tax, then there will be • If the fee is a retribution: double taxation as the supervisees have paid income tax • It will transform financial supervision from public goods to common resources • If the fee is a retribution, what is the direct benefits obtained by the • This creates further complication as if supervisees? the supervision is similar to toll road: if you don’t want to pay then OJK will not • The fee will give extra burden to supervise you!!! customers of the supervisees 8

Estimated time for unification of two organisations • It took at least 2 years for KPK, Penetapan struktur organisasi PPATK and LPS to make internal Penetapan rencana strategik: tujuan, strategi, program aksi arrangement before they can Alokasi pegawai dan tugasnya effectively deal with a case Penetapan pemimpin divisi/departemen di lembaga baru • Since October 2007 only 108 regional offices of BNPB (called 1,5 Tahun 0,8 Tahun 1,1 Tahun BPBD) has been established out of 1,2 Tahun 0,7 Tahun 0,9 Tahun 2 Tahun 399 units which should have been established Integrasi proses penganggaran • During the transition period, if Penyatuan sistem IT there a crisis strike, then the economy is at vulnerable stage. Penetapan kerangka hukum, lingkup kewenangan, fungsi, dan tujuan 9

Alternative Models of OJK 10

Scenario I: Three Pillars Model • The three regulators have to President conduct data sharing and data interfacing among them (arrow sign) • Attempts should made to improve Division of Supervision Division of Bapepam-LK Supervision Of The Ministry of the quality of supervision and to KUKM Bank Indonesia minimise the heterogeneity of the quality of supervision Capital (mainstreaming the quality). Commercial Market and Banks and Futures NBFIs, BPR • Attempts should be made to Market Cooperatives, minimise the no man’s land of the Financial Companies, existing supervision. and BMT 11

Complexities Advantages The system requires substantial The coordination among the regulators can be • • resources to be allocated in order to channeled through data sharing and data conduct data sharing and data interfacing interfacing The Three-Pillar model revitalise the system of • – The heterogeneity of the quality of supervision without changing its structure information across the regulators are Mainstreaming of the quality of supervision • unknown may be easily conducted The system is in jeopardy if one • SPLK has a clear cut the role of supervision, • regulator reluctant to share the data or which one should focus more on micro and refuse to improve the quality of macro prudential, which one should focus supervision. more on business conduct – The ego centrism across government departments is paramount All financial institutions can be covered by the • SPLK If the data sharing fails, then the • system may not be able to tackle SPLK reduces the vulnerability of the economy • moral hazard in inter market or the toward crisis during during the transition emergence of hybrid products. period 12

Scenario II: Two-Stage Model PRESIDEN T PPATK Division of Division of Supervision Supervision Bapepam- LK The Ministry of Bank KUKM Indonesia Capital Market and NBFIs, Cooperatives, Commercial Banks Financial Companies, Futures and BPR and BMT Market 13

Two-Stage System Advantages PPATK ensures that data sharing and Data sharing and data interfacing can • • data interfacing among the regulators be ensured will be conducted The detection rate is expected to • Ideally PPATK should have a right to improve substantially due to • investigate and to prosecute multistage monitoring system – It requires amendment of the The mainstreaming on the quality of • money laundering act supervision across regulators is more attainable since it can be imposed and Any inter market case will be dealt by • supervised by PPATK PPATK, whereas within the market case will be dealt by the respective All financial sectors are covered by the • regulator. system PPATK reports to President The system will improve the detection • • rate for money laundering activities. 14

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