The House of Representatives also has only four days in which to approve the bill on the Financial Services Authority (FSC), which will integrate the oversight of banks and all other financial services, including the capital market, before ending its 2010 sitting period and going into recess until the middle of next month.

It is a great pity, however, that the central bank prolonged its political battle to retain its banking oversight mandate, going as far as allowing its staffers’ trade union to formally assert their outright opposition to the integration of financial services oversight at a House of Representatives session.

Union delegates even made a veiled threat warning of unwillingness to work for the incoming FSC, even though Bank Indonesia supervisors are expected to initially form the core staff of the FSC banking supervision division.

This, we think, is worrisome, taking into account the lingering threats of European debt woes and the absence of a financial crisis management protocol, because the bill on the financial safety net is still stuck at the House. A bank failure, however small, could cause confusion and spark a blame game amid the absence of clear-cut rules right now.

It is therefore most imperative and urgent that the House approve the bill on the FSC on Friday before going into recess. The legislation is already more than two years behind schedule.

Judging from progress until now, and assuming that the bill is approved on Friday, the FSC will only be able to operate at full throttle in 2013, at the very soonest, after a transition period of at least two years for processes of reorganizing and integrating the oversight mechanism.

But we think this is still better than another option being tossed around by several politicians, whereby the 2004 central bank law is simply amended to give a new deadline for the establishment of the FSC.
There is no longer any reason for another delay in enacting the law on the FSC, because both the House and the government have agreed on the basic principle that the oversight of all financial services should be integrated under a single authority.

BI would then be left to focus on its core function — monetary policy.

The 2008 global financial crisis, which started in the United States, has indeed caused mixed reactions to the virtues of a single financial services oversight authority. But the crisis also revealed how deeply integrated the financial services industry has been, and how a failure in one segment of the industry could cause extensive damages to another.

The findings of the investigations into the financial distress of Bank Century in 2008, its eventual bailout, and the collapse of Bank IFI in 2009, showed how the competence and integrity of the central bank’s supervision capacities badly needed considerable improvement.

Moreover, the size of the country’s banking industry — over 120 Jakarta-based banks, more than a dozen regional banks and hundreds of secondary (rural banks) — seems too large for Bank Indonesia to effectively oversee.  

Continued access to insider information, which has been used by Bank Indonesia as an argument to retain its role as banking supervisor, seems rather weak because the central bank will occupy at least two seats at the seven-member FSC governing board of commissioners.

 Of more importance now is for the House to make sure that the FSC will truly become a politically independent institution. The most effective way to do so is by establishing a credible recruitment and appointment process for the seven commissioners.

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