T

he newly appointed chief of the Financial Services Authority (OJK), Wimboh Santoso, has promised to improve efficiency within the OJK, such as by cutting expenses and reducing the number of its deputy commissioners.

Cutting costs is not a very critical strategy that needs to be taken at this stage. This move is usually taken by corporations and in order to look dashing when a new CEO is appointed.

Instead, the OJK should focus more on quality improvement, as it faces now both internal and external challenges. A key problem with the OJK is that it relies 100 percent on the financial industry to cover its operational costs. Each bank in Indonesia pays a fee of 0.045 percent of its total assets to the OJK.

There are several other action plans that deserve to be given priority by Wimboh, a former senior executive of Bank Indonesia (BI).

First of all, the OJK must be more independent. Independence is listed as the second principle of the Core Principles for Effective Banking Supervision of the Basel Committee on Banking Supervision.

The essence of this principle is that there should be no industry interference that compromises the operational independence of the supervisors, and this includes the budget for staff training and travel.

If the OJK is fully funded by contributions from the industry, then the industry will have a tendency to undermine OJK’s authority.

Besides, bankers everywhere are powerful lobbyists. To that end, the government should be prepared to bear most of OJK’s operational costs or at least 30 percent. If the OJK wants to become an effective financial services supervisor, then one of the conditions should be that the OJK is independent from the financial industry.

Second, the OJK boss should emphasize more on the direction of the OJK in the future as a truly qualified banking supervisor to ensure strong financial institutions, and orderly resolution if necessary.

To make it happen, the OJK really needs to apply the international capitalization standard (Basel III) correctly according to international standards, followed by banking industries with discipline.

For example, the Regulatory Consistency Assessment Program of the Basel Committee on Banking Supervision issued its findings on the implementation of Basel III in Indonesia in December 2016.

The assessment results state that the credit risk component in the capitalization of Indonesian banks do not comply with the international standards under the Basel Framework.

Furthermore, the Assessment Team notes that, in several places, the Indonesian rule is less than the Basel framework, especially with respect to the treatment of complex financial products. The assessment clearly shows that the quality standards of Indonesian banking supervision are not aligned with international standards, or have been left behind.

The question now is whether the current old fashion supervisory style that the OJK has adopted where traditional capitalization and liquidity are included, can face a more complex crisis in the future than that in the past.

The standard frameworks currently put into operation by financial services authorities in Europe in order to have sound banking systems are the internal capital adequacy assessment process (ICAAP), internal liquidity adequacy assessment process (ILAAP) and recovery plans.

Banks in the Netherlands, for example, earnestly benefited from robust implementation of these three frameworks. ICAAP, ILAAP and a recovery plan will become excellent tools for the OJK in order to be able to supervise the banking system well in an effort to promote a strong and sound banking sector. ICAAP has been implemented but yet optimally, whereas ILAAP and a recovery plan are still to be adopted properly in Indonesia.

To gain more stature, the OJK is kindly advised to look to its close neighbor, BI, which has largely retained its independence thanks to its budget self-sufficiency. BI has continually invested in quality of human capital and infrastructure.

However, neither the legislature, the government nor the public have hardly ever mentioned BI’s cost efficiency endeavors.

The central bank apparently spent Rp 8.2 trillion in 2016 as general and administrative expenses “merely” to oversee national payment systems and safeguard monetary and financial stability (Rp 8.3 trillion in 2015).

In contrast, the OJK’s activities are in many ways more human capital intensive and costly with various kinds of financial institutions under its purview, in addition to the fact that the OJK was just established a few years back.

In a nutshell, the OJK’s central issues are its independence, quality of financial sector regulation and supervision. When the government contributes a part of the OJK’s annual budget, then the regulatory capture by the industry will be limited.

At the same time, it also retains a degree of resistance from possible political pressure from the government or political parties.

Given adequate financial resources, the OJK should also be adequately equipped to hire and invest in high caliber staff to safeguard increasingly complex regulatory standards. Cost cutting is almost always relevant, but an emphasis on it can be best associated with the other financial authority, where Wimboh spent most of his professional career.
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The writer has been working at a Dutch bank since 1977 as credit analyst, credit portfolio risk analyst and accountant. The views expressed are his own.