Restructuring financial supervision Chandra Kusuma  ;   An analyst of international finance cooperation at the Regional and Bilateral Policy Center, Finance Ministry

JAKARTA POST,  07 Mei 2014

                                               

                                                                                         

                                                      

According to the Organization for Economic Cooperation and Development (OECD), a conglomerate is defined as a firm or business enterprise having different economic activities in different unrelated industries. Conglomerates may emerge through mergers and acquisitions and/or investments across a diverse range of industries for a variety of reasons such as minimization of risk, increased access to financial and management resources, as well as a more efficient allocation of resources. Indisputably, the financial services industry in Indonesia is not an exception to this condition. In fact, the existence of conglomerates in the financial services industry is one of the main driving forces for the establishment of the newly established Financial Services Authority (OJK) at the start of 2013. Recently, the OJK identified at least 31 conglomerates in the financial services sector, almost all of which are headed by a parent bank (including a few big banks) and most of which have a limited amount of non-banking financial business. The Jakarta Post also reported recently that the financial conglomerates in Indonesia had assets amounting to about US$786.88 billion and made up more than 53 percent of the assets of Indonesia’s financial institutions. Economists and financial experts around the world agree on the premise that conglomerates cause anti-competitive practices. This is the major concern about conglomerates’ operations. Nevertheless, the growing global concern on financial stability has prompted many financial services’ authorities to pay more attention to the operations of conglomerates. Risks associated with this grouping of companies may surface. The risks include inefficient business operations resulting from the complex organizational structures, occurrence of conflicts of interest, increased inducements for tie-in sales, intra-group risk contagion, risk concentration and so on. Encouragingly, the OJK has assured the public that financial conglomerates will be put under more scrutiny and monitored more thoroughly. A recent report by the Financial Stability Board (FSB), a key international body to coordinate at the international level the work of national financial authorities and an international standard setting body, pointed out that the OJK’s Board of Commissioners (BoC) has established a unit that is tasked with implementing the integrated supervisory framework for financial conglomerates. This unit should be embedded within the sectoral supervisors covering those entities of the financial conglomerates that are deemed to have the highest risk profile. But the supervision of financial conglomeration brings implications to the financial regulatory structure all together. The establishment of a single unit embedded within the sectoral supervisors may not be adequate. This is the most important point of the FSB report on Indonesia (FSB Peer Review of Indonesia-Review Report, February 2014). To be specific, the FSB recommends that the OJK shall review its organizational structure and supervisory approach promptly, and revise them as needed to deliver the benefits of an integrated supervisor. In particular, the OJK shall explore ways to better integrate banking supervision with other areas within the OJK, harmonize supervisory approaches across different sectors, and develop reporting structures and processes that ensure supervisory teams do not work in sectoral silos. As acknowledged, the current organizational structure and supervisory approach of the OJK only mirrors that of the pre-existing constituent agencies (Bapepam-LK and Banking Supervision-Bank Indonesia), since they continue to be largely based on individual sectors (banking, capital market, and non-bank financial institutions). Moreover, the current legally mandated governance structure, with separate chief executives for each sector, raises the risk that the OJK will not be able to leverage cross-sectoral knowledge or adopt a fully integrated approach to supervision. In relation to the aforementioned issues, the OJK urgently needs to adopt a functional supervisory approach in its organizational structure if it wants to monitor the conglomerates effectively. A functional approach uses the governance structure based on the supervisory function performed by the authorities. It includes separate structures for each of the process, i.e. licensing, monitoring, examination and enforcement. Yet, those separate structures should apply to all financial services firms. One of the best models available in Asian countries for this type of structure perhaps is the Japan Financial Services Agency (FSA). This way, the OJK can have the integrated conglomerate monitoring by leveraging cross-sectoral knowledge under a single organizational structure of monitoring. But one should realize the OJK is still new as it only commenced full-fledged operations in January when it took over the function of bank supervision from Bank Indonesia. Even so, the development dynamic of the financial services industry is moving forward, with or without supervision. Moreover, the industry’s development is going at an even faster pace than an authority could have anticipated. The Indonesian authorities might have been careful to ensure the stability of supervisory functions during the current transition period, yet they also need to deliver on the benefits of an integrated supervisor that the new structure has been designed to achieve. We hope that the OJK will be able to conduct the much needed organizational restructuring as soon as possible. ●