Q+A-Indonesia to set up new financial regulator

Published: 13 May 2010 20:40:28 PST

JAKARTA, May 14 - Indonesia plans to set up a new regulator to improve the oversight of banks, brokerages, and other financial institutions by the end of this year.

Investors say the move is long overdue.

The Financial Services Authority (OJK) will take over the current regulatory functions of the central bank and the capital markets watchdog Bapepam. Parliament still needs to give its legislative approval.

Southeast Asia's biggest economy is in sore need of a tough and independent regulatory body, particularly given the renewed interest of investors in the capital markets.

Here are some questions and answers about the new regulator:

WHY IS INDONESIA SETTING UP A NEW REGULATOR?

Poor regulation is one area, alongside a weak legal system and widespread corruption, that foreign investors have identified for years as major stumbling blocks to investment in Indonesia.

Authorities introduced several improvements after the 1997-98 Asian financial crisis, but oversight of the financial sector has remained weak.

This was illustrated by the case of mid-sized lender Bank Century, which was rescued from financial collapse by the state following alleged fraud by its main shareholders.

Bank Indonesia, the central bank, has proved reluctant to relinquish its supervisory role over commercial banks because it fears this would reduce its effectiveness in maintaining economic stability.

State agency audits have found various fraudulent practices in the banking sector, including loans that were not backed by adequate collateral.

WHAT WILL CHANGE ?

The new agency will take over the central bank's current job of overseeing and regulating commercial banks and Bapepam's role of supervising non-bank financial institutions.

The independent agency will have the power to approve and revoke permits and conduct investigations of financial institutions including banks, brokers, insurers, pension funds, finance firms, pawnshops, venture capital firms, fund management companies, savings and loans cooperatives.

It will probably have three main departments overseeing the capital markets, the banking industry, and the non-banking financial industry, such as insurance and leasing.

WILL IT BE EFFECTIVE? ANY IMPACT ON THE FINANCIAL SECTOR?

That will probably depend very much on who is in charge, particularly given that in a country where corruption is rampant, investors will want to see a tough reformer in the driving seat.

Darmin Nasution, the acting governor of Bank Indonesia and one of outgoing Finance Minister Sri Mulyani Indrawati's trusted lieutenants, was seen a possible candidate to head the new regulator, but traders now speculate he will be nominated as governor of Bank Indonesia.

Bapepam's chief Fuad Rahmany is also seen as a possible candidate. Views about Rahmany are mixed. Some consider him to be a weak regulator while others say he has done a decent job as the head of Bapepam despite its limitations.

Some legislators think the agency should have as much power as possible, including the ability to conduct criminal investigations into financial frauds, but others worry about the potential for abuse of power.

"The important thing is that we will set up a structure that will address the current weaknesses such as conflict of interest between regulators and supervisors," said Rahmany, who played a key role in drafting the details of the proposed scheme.

ANY OTHER CHALLENGES?

Some bankers are concerned that with a separate regulator, Bank Indonesia may find it harder to respond quickly to prevent market instability, for example in the foreign exchange market.

They worry that the central bank may become slower to act on currency market intervention because weak coordination among government agencies may limit the central bank's access to up-to-date information about banks' financial positions.