Professional Documents
Culture Documents
DOI: 10.1355/ae23-1g
Having initiated reforms in the financial sector in late 1997, the government of Indonesia also
introduced a new Central Bank Independence Act in early 1999. The next task for the
government is to devise a safety net system for the financial sector, which includes the
possibility of establishing an integrated financial sector supervisory agency. This study draws
essential lessons from the experiences of other countries to highlight a number of key
challenges facing Indonesia in designing its integrated financial sector supervisory agency,
especially at the early stages.
Keywords: unified financial sector supervisory agency, bancassurance, central bank, Indonesia.
© 2006 ISEAS
Bank Investment
Country Securitiesa Insuranceb Real Estatec
in Industrial Firmsd
Indonesia Permitted Permitted Not permitted Not permitted
Malaysia Permitted Permitted N/A Permitted but restricted
Philippines Permitted for both Permitted for both Permitted with Permitted with limitations
universal and universal and limitations for for universal banks only
commercial banks commercial banks universal banks
with limitations with limitations only
Thailand Permitted Permitted Permitted Permitted but restricted
Singapore Banks may hold Locally Limited in the Interests in the excess of
equity participation incorporated aggregate to 10%, or that give the
in stockbrokering banks may own 20% of bank’s bank significant influence
firms with MAS insurance capital over the management of a
approval companies with company, require
MAS approval regulatory approval. In
addition, a bank may not
invest more than 2% of
its capital funds in any
individual firm.
NOTES: N/A = No information is available yet (to be confirmed).
a. Securities activities include underwriting, daling and brokering all kinds of securities and all aspects of the mutual
fund business.
b. Insurance activities include underwriting and selling insurance principal and as agent.
c. Real estate activities include real estate investment, development and management.
d. Including investments through holding company structures.
SOURCES: Claessens (2002); Bank of Thailand Reports (various years); Bank of Indonesia (various reports), Milo
(2004).
deliver bancassurance with a potential market of At the end of 2002, Martinez and Rose (2003)
around Rp14 trillion, and at least fifteen banks reported that at least twenty-two countries have
offer mutual funds, mostly based on government adopted a fully integrated supervisory agency, and
bonds (see Hidayat 2003, and Table 2). It is twenty-four countries have partially unified
estimated that up to June 2003, around 85 per cent the supervision of two types of financial
(or roughly Rp58 trillion) of the mutual funds intermediaries (Table 3). The Scandinavian
were sold via banking institutions. economies (namely, Denmark, Norway and
As the role of financial conglomerates continues Sweden) were the first to establish their integrated
to rise, concerns become more apparent over supervision agencies starting between 1986 and
the effectiveness of multiple regulatory and 1991.3 The creation of the Financial Supervisory
supervisory agencies (Taylor and Fleming 1999, Authority in the United Kingdom was announced
Mwenda and Fleming 2001, and Claessens 2002). in 1997. As a consequence of Korea’s
Countries Banks
Indonesia Bank International Indonesia; Bank Negara Indonesia; Lippo Bank; Bank Danamon;
Bank Niaga; Bank Pan International (Panin Bank); Bank Central Asia; Bank Mandiri,
Standard Chartered Indonesia; and Citibank Indonesia.
Malaysia Maybank; Affin Bank; Bumiputra-Commerce Bank; Southern Bank; Citibank
(Malaysia); HSBC (Malaysia); OCBC (Malaysia) Bank; United Overseas Bank (UOB);
RHD Bank; EON Bank.
Philippines Bank of the Philippine Island; Philippine National Bank; Allied Bank; Equitable PCI
Bank; BDO Unibank; Security Bank Corporation.
Thailand Bangkok Bank; Kasikorn Bank; The Siam Commercial Bank; Bank of Ayudhya; The
Thai Military Bank; Standard Chartered Nakornthon Bank; Bank of Asia; UOB
Radanasin Bank; DBS Thai Danu Bank; Krung Thai Bank; Bangkok Metropolitan
Bank; Siam City Bank and Bank Thai.
NOTE: For each of the banks listed, we examine the list of products and services that the intermediaries provided. In
each of them, we find at least an insurance product or an investment product, or both being offered by the banks.
SOURCE: Various websites of the listed banks and the central banks of the countries.
restructuring process of its financial sector shared among different institutions. The central
following the outbreak of the financial crisis in bank as stated in Article 8 of Law No. 23/1999 is
late 1997, the country consolidated all its responsible for the tasks of regulating and
supervisory agencies for bank and non-bank supervising the banking sector. The Ministry of
institutions, securities and futures markets, and Finance is responsible for the insurance sector.
insurance into a single supervisory board (the The stock exchange is under the direct supervision
Financial Supervisory Service) on 1 January 1999. of its own Capital Market Supervision Authority
The most recent examples of countries adopting a (BAPEPAM).
single supervisory body are Estonia, Germany, The new supervisory institution will
Ireland, and Malta in 2002. Highlighting further undoubtedly alter the landscape of the financial
the rising importance of this unified supervisory safety net system of the country in the near future.
approach, an informal club of “integrated The official target date for the establishment of the
supervisors” — comprising representatives from single supervisory agency is no later than
Australia, Canada, Denmark, Japan, Korea, December 2010. Clearly, this is a mammoth task
Norway, Singapore, Sweden, and the United for the country to deliver within a relatively short
Kingdom — met in Sydney, Australia in early period of time. The objective of this paper is to
May 1999 for the first time. identify selected key potential challenges
Like all the economies affected by the 1997 associated with the initial design process of the
financial crisis in East Asia, Indonesia pushed integrated financial sector supervisory board in
forward a few key reform commitments, including Indonesia.
a plan to establish a single financial supervisory The remainder of the paper is organized as
board. Presently, the functions of regulation and follows. Section II briefly reviews a number of
supervision of the financial sector in Indonesia are key aspects behind an integrated financial
1. Requiring banks to appoint Compliance Directors, responsible for ensuring the banks’ compliance
with existing regulations (BI regulation No. 1/6/1999)
2. Strengthening legal lending limit regulation (BI regulation No. 2/16/2000)
3. Submission of the quarterly and annual financial report to Bank Indonesia (circular letter No.
3/30-31/2003).
4. Application of risk management for commercial banks (BI regulation No. 5/8/2003).
5. Implementation of Know Your Customer Principle (BI regulation No. 5/21/2003).
6. Enhancing the competence and integrity of bankers by imposing a Fit and Proper Test on each
bank’s shareholders and management (BI regulation No. 5/25/2003).
7. Strengthening Bank Indonesia supervisory function and the status of bank (BI regulation No.
6/9/2004).
8. Application of risk management for transaction through Internet (BI regulation No. 6/18/2004).
SOURCE: Bank Indonesia Website, www.bi.go.id.
issued fraudulent letters of credit for fictitious motivate prudent management by enhancing the
transactions involving exports. The scandal degree of transparency in banks’ public reporting.
highlighted the lack of internal control between
branches and poor governance in the state-owned
IV.2 Integration Process: Harmonizing
banks. The closures of Bank Dagang Bali and
Supervision Practices
Bank Asiatic in early 2004, unearthed other
examples of moral hazard practices, such as Once the performance of different supervisory
related-party lending, fabrication of asset records, agencies has been improved, the next stage is the
and fictitious credit records, in the banking integration process of the agencies. As briefly
industry. discussed in section II, it is pertinent for the
To improve banking supervision, the adoption unified supervisory body to have an in-depth
of the Basel II Framework endorsed on 26 June understanding of the different objectives and
2004 by the central bank governors and the heads practices associated with supervising different
of bank supervisory authorities in the Group of groups of financial institutions. In a country where
Ten (G10) countries should be considered in banks dominate the financial sector, such as in
Indonesia. Initial steps have also been taken by Indonesia, an ill-prepared supervisory agency may
other Southeast Asian countries to adopt this focus its resources on the banking sector at the
framework.6 The Basel II framework improved expense of the other financial institutions. The
further the 1988 Basel Capital Accord and its 1996 lack of an overall appreciation of the financial
supplement by introducing three pillars to further industry on the part of the new supervisory agency
stabilize the financial sector. The first pillar may eventually impair its ability to communicate
revises the 1998 Accord’s guidelines by aligning its objectives and policies to the markets.
the minimum capital requirements more closely An adequate grasp of all the tasks associated
with each bank’s actual risk of economic loss. The with the different supervisory roles is necessary
second pillar recognizes the necessity of for the unified agency to implement a harmonized
exercising effective supervisory review of banks’ set of supervisory practices. One possible
internal assessments of their overall risks. The last approach is through a gradual integrating process
pillar leverages the ability of market discipline to of the agencies. A number of countries have
TABLE 5
Ownership Regulations Governing Banks and Insurers
NOTES
The initial draft of the paper was presented at a conference on “Lender of Last Resort Function of the Central Bank
Lessons and Implications for Indonesia”, August 2003, Jakarta, Indonesia. Parts of the paper have been completed
during the first author’s visit to the Asia Pacific Division-4 of the International Monetary Fund in Washington, D.C. in
September 2005. The authors wish to thank the referees for their valuable comments. The usual disclaimers apply.
1. Those countries are Australia, Canada, Denmark, Estonia, Hungary, Iceland, Korea, Latvia, Luxembourg, Malta,
Norway, Singapore, Sweden, and the United Kingdom.
2. A financial conglomerate is defined as any group of companies under common control whose exclusive or
predominant activities consist of providing significant services in at least two different financial sectors (banking,
securities, insurance) (Martinez and Rose 2003).
3. Norway was the first to establish an integrated supervisory agency in 1986, followed by Denmark in 1988, and
Sweden in 1991.
4. Refer to Goodhart and Schoenmaker (1995) for further discussions on the arguments for and against the
separation between supervision and monetary policy.
5. The main responsibility of a corporate secretary is to keep informed about capital market regulations, to provide
information on the company’s condition to the public, to give advice to the directors regarding compliance with
capital market regulations, and to act as a liaison between the company and its stakeholders.
6. The Bank of Thailand has indicated agreement with the general principle of Basel II but has concerns about the
effect of its implementation on the banking sector. With the Financial Institutions Businesses Act, which will
allow the Bank of Thailand to institute prudential standards in line with international standards, still vying for
legislative approval, it is likely that the Thai central bank would take a gradual phasing in of Basel II. In doing
so, a further consolidation of the Thai financial sector should be expected in coming years (Fan 2003).
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Reza Y. Siregar is Senior Lecturer at the School of Economics, University of Adelaide, Australia.