Reform in Financial Sector Can Disrupt Market Stability

KOMPAS/PRIYOMBODO

Financial System Stability Committee (KSSK) members (from left) Financial Services Authority (OJK) commissioner Wimboh Santoso, Finance Minister Sri Mulyani Indrawati, Bank Indonesia Governor Perry Warjiyo, and the Deposit Insurance Corporation Board of Commissioners chairman Halim Alamsyah, pose for a group photo during a press conference on 29 Jan. 2019 at the Finance Ministry in Jakarta. The KSSK announced that the Indonesian financial system in the fourth quarter of 2018 was in a “normal” condition of stability.

JAKARTA, KOMPAS – Economic analysts are worried that the government’s plan to reform the country’s financial system could disrupt the stability of the financial market. Amid the continued increase in Covid-19 cases, and the threat of an economic recession, the government should not raise issues that cause the market to react negatively, they said.

The government is reviewing various laws and legal instruments related to financial system stability in anticipation of a crisis. In the past week, there has been discourse on the need to issue a government regulation in lieu of a law (Perppu) on financial system reform.

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A senior economist at the Institute for Development of Economics and Finance (Indef), Drajad H Wibowo, opposed such an idea. He said no countries overhauled their financial and monetary systems in times of crisis. Structural and system changes should be carried out after the crisis ended, not during the crisis, he said.

"The current situation is like a house hit by a storm. If the owner of the house demolishes the kitchen, bathroom, during a storm, the house will be even more destroyed," said Drajad in a webinar titled Financial Sector Stability and Perppu on Financial Reform on Tuesday.

The impact of Covid-19 on the Indonesian economy is not as deep as that in neighboring countries, which depend heavily on the external sector. The condition of domestic banks and non-bank financial institutions is also relatively good and is able to withstand the pressure of Covid-19. Do not let the new regulations destroy the resilience of the economy.

According to Drajad, the discourse on the issuance of a Perppu on the financial system reform is illogical and unclear. In fact, there is concern that the reform could endanger the stability of the financial system. The issuance of the Perppu could bring a signal that the government is in confusion and panic, which could in turn adversely affect the market sentiment.

"The Perppu gives the impression that the government is confused and panicked …. The issuance of the Perppu cannot be issued arbitrarily because it can bring a negative sentiment to the market,” said Drajad.

For example, the reform can be made on the Law on Deposit Insurance Corporation (LPS) to provide additional power in coping with a failed bank.

Meanwhile, Aviliani, the head of the Research and Development Division of the Association of National Banks (Perbanas), said that financial system reform should be carried out in each institution, not in the entire financial system. For example, the reform can be made on the Law on Deposit Insurance Corporation (LPS) to provide additional power in coping with a failed bank.

KOMPAS/AGUS SUSANTO

A woman steps off an escalator on Saturday (22/8/2020) at the ITC Mangga Dua shopping center in Pademangan, North Jakarta. Purchasing power is a major contributor to the Indonesian economy, which recorded that household consumption, which accounts for 57.85 percent of GDP, contracted by minus 5.51 percent on an annual basis in the second quarter of 2020.

In addition, a change is also needed in the Law on Prevention and Management of Financial System Crises. The finance minister as the chairman of the Financial System Stability Committee (KSSK) should also be given additional power so that she or he who at present acts only a coordinator could become a policy maker. Such an authority is needed so that the agency does not rely on the President in issuing a policy.

"In the past, there was a fear that giving an authority [to KSSK chairman] to become a policy maker could turn it to a superpower body. If no one can make any decision, it will be more dangerous,” said Aviliani.

Conglomeration

The director of risk management of state owned Bank Mandiri, Ahmad Siddik Badruddin, said that instead of debating whether or not a Perppu was needed to reform the financial system, the government should focus on improving supervision and regulation in the future. The challenges faced by the financial system could become even more severe after the pandemic ended.

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One of the risks that need to be anticipated is the increase in conglomeration in the financial system. According to existing data, as of December 2018, there were 48 financial conglomerates that controlled Rp 6.93 quadrillion in financial assets or around 65.8 percent of the total assets of the country’s financial industry which reached Rp 10.54 quadrillion.

Of the 48 financial conglomerates, 34 conglomerates come from the banking industry, which control Rp 6,743 trillion or 84 percent of the total assets of the national banks, 11 conglomerates from the non-bank financial industry and the other three conglomerates from the capital market.

"The supervision on the standardization of regulatory frameworks and supervision of financial conglomerates should be further increased," said Siddik.

The domino effect of conglomeration is dangerous.

According to Siddik, risks arise due to the increasing number of interconnections and interdependencies among conglomerates in the banking industry. Therefore, the Financial Authority Agency (OJK) as the policy maker in the financial sector should increase the supervision in risk mitigation efforts. The domino effect of conglomeration is dangerous.

The managing director of the Political Economy and Policy Studies (PEPS), Anthony Budiawan, said that Law Number 2 of 2020 concerning state financial policy and financial system stability had already had adequate authority to cope with the impact of the pandemic.

The issuance of a Perppu on the financial reform is not needed, because with the existing laws, the government would still be able mitigate future financial system risks in each financial institution. Meanwhile, reform of the financial system must be carried out for a long-term period, not only to cope problems during the pandemic.