Discourse: BI prioritizes bank efficiency before supervision goes to OJK

Bank Indonesia (BI) has blamed inefficiency in the nation’s banking sector for high borrowing costs and their negative effect on the economy. Speaking to The Jakarta Post’s Esther Samboh, BI governor Darmin Nasution unveiled plans to correct shortcomings before the central bank turns over supervisory authority over the banking sector to the new Financial Services Authority (OJK). Below are excerpts of the interview:

Question: How will BI ensure that overlapping responsibilities with the OJK will not disrupt decision making when the global economic climate is precarious?

Answer: By law, macro-prudential [measures are] under BI and micro-prudential [measures are] under the OJK. First, there’s no clear-cut line between the micro-prudential and macro-prudential. Second, macro-prudential could combine with micro-prudential policies. The overlap is getting wider.

Considering the huge potential for overlap, I suggest the OJK, BI and the Finance Ministry establish a coordination mechanism to find a solution to [potential] clashes, differences and overlaps. We don’t believe that overlaps will be clear and well-defined at the beginning. The dynamics will show up during the operational process.

What does BI want to prioritize before banking supervision is transferred to the OJK?

Our experiences at Bank Indonesia show that bank supervisors are not too concerned about bank efficiency. They care more about bank health. They think that it’s okay to be inefficient, as long as the banks are healthy.

Therefore, before bank supervision moves to the OJK, we have to boost bank efficiency. Otherwise it will be difficult.

What will BI focus on to boost efficiency?

Spread and deposit rates. To boost lending and bring down lending rates, we believe we still have room to discuss with banks the spread between deposit rates and lending rates.

Other than that, we also have a plan to cooperate with the government — the Finance Ministry and the State-Owned Enterprises Ministry — and the Deposit Insurance Agency (LPS) to lay out steps to bring down high deposit rates without changing policy rates.

We will boost bank efficiency and try to minimize pressures from big fund owners to peg deposit rates according to their interests — aiming to bring down lending rate gradually.

What about further cuts to BI’s benchmark policy rate?

The policy rate is not something that can be increased or cut at all times. We’re always looking forward to the next year. After all, businesses and investors need certain points
to cling to.

When we cut the policy rate to 6 percent, we were thinking of the next year. What will happen in the next one year, nobody knows. It might affect the BI rate. But as long as the situation is within the range of what we have forecast, we actually will have considered it all.

What about limiting bank ownership or multiple licenses for domestic and foreign banks?

We expect to conclude multiple license regulations this year, while the more difficult areas [will be pushed] to at least next year.

A bank-ownership cap is a difficult. First it may require a long transition period. Our capital markets will not be able to handle it, despite a long transition, because of low market capitalization.

What’s the point of making a policy that has a transition period that is too long? Second, there’s a dilemma. Without a majority shareholder, it will be unclear who will take responsibility if the bank suffers troubles. On the other hand, our assessments show that individual dominance creates irresponsible actions. The owners could end up embezzling their banks to the verge of collapse.

We are trying to find a balance by doing exercises and looking at other countries’ experiences. We need time to find a solution. The multiple license policy, which is simpler, will probably be issued before the bank ownership cap.

The direction is that limitations for individuals and institutional will be different. Shareholders, be they individuals or institutions, must not be affiliated.

For highly regulated financial institutions, there is a possibility that they may be able to control majority stakes with several requirements, including a commitment to support the bank in times of trouble. The option will not be to bail out, but to bail in.