BI calls for revision of banking law

The central bank has called for a revision of the banking law, which it says is outdated and thus inadequate to deal with the rapid changes in the banking system.

“I believe there’s a need for a revision because the existing [banking law] can no longer accommodate the swift changes in the banking system,” Bank Indonesia Deputy Governor Muliaman D. Hadad said Monday after a seminar on the banking system.

He added several points in the law needed to be revised, including those on the intermediary roles of banks, their internal control and the roles of their commissioners.

“At present, all these points are addressed in the central bank’s regulations,” Muliaman said.
“I believe they should be included in the law.”

He declined to say when the central bank planned to send its revised proposal to the House of Representatives.

The existing law on banking was introduced in 1998, and a revision passed in 2002.

Legislator Andi Rahmat, from the House’s Commission XI overseeing financial affairs, said incidents of bank fraud, such as that at the now-defunct Bank Century, had been allowed to thrive partly because of the weaknesses in the banking law.

The government, through the Deposit Insurance Corporation, bailed out the bank — now renamed Bank Mutiara — in November 2008 at a total cost of Rp 6.76 trillion (US$716 million).

“The current banking law still has too many loopholes,” Andi said.

“So the key thing is how to make our banking law more comprehensive and eliminate the loopholes.”

He added the plan to establish a powerful financial services authority, or OJK, could invite greater moral hazards.

The OJK will function as a regulatory body overseeing the entire financial system, including banks, insurance firms, consumer finance companies and investment funds.

“This would be a super body, far greater than BI,” Andi said.

“Consequently, the moral hazards will be magnified.

“[The establishment of] this body won’t be easy,” he went on.

“What will be easy, though, is to scrap the article on the [establishment of] the OJK in the law on Bank Indonesia.”

Article 34 of the 2004 Bank Indonesia Law stipulates banking supervision — currently the domain of BI — will be taken over by the OJK, which must be established before Dec. 31 this year.

BI and the Finance Ministry are now drafting the bill on the establishment of the OJK.

Muliaman said the draft bill was still being discussed, adding there was a need for macro-prudential and micro-prudential supervision.

However, he said it had not yet been decided which institution would take control.

He also said BI would review the role of a compliance director in banks, because of the conflict of interest posed by the fact that the director, tasked with supervising a bank’s compliance with regulations, is paid by the bank.

“We’ll find a solution to make it more effective,” Muliaman said.

“There may be some reorientation because of our willingness to improve banks’ risk management.”

Economist Aviliani, a commissioner at state-owned lender BRI, said BI should assign the compliance directors to avoid any conflict of interest.

Economist Ryan Kiryanto, from state-owned BNI, said BI should put in place preventive measures rather than corrective ones in supervising banks in future.