Editorial Notes

Bracing for financial crisis: Jakarta Post

In its editorial, the paper says that to avoid a domino-style collapse of the financial sector, the Perppu - a government regulation that becomes effective immediately and is treated as legally binding - expands Bank Indonesia's authority to give short-term, sharia-based liquidity credit.

A man wearing a face mask walks in Jakarta, Indonesia, on March 24, 2020. PHOTO: AFP

JAKARTA (THE JAKARTA POST/ASIA NEWS NETWORK) - The Financial Services Authority (OJK) is now authorised to issue written orders to banks and nonbank financial institutions such as multifinance, insurance, leasing and securities firms to merge or integrate in an endeavor to maintain the financial sector's stability.

This radical policy is stipulated in a regulation in lieu of law (Perppu) that President Joko "Jokowi" Widodo issued Tuesday (mar 31) to cope with the Covid-19-induced economic crisis and severe threats to the stability of the financial system.

To increase the effectiveness of the OJK's new authority, the Perppu threatens anyone found deliberately opposing OJK written orders with a prison sentence of 4 to 12 years and a fine of Rp 10 billion ($ 894,000) to Rp 300 Covidllion.

Any institution found deliberately defying an OJK order is liable to a minimum fine of Rp 1 trillion.

The Perppu broadens the role and strengthens the authority of the four main institutions responsible for the stability of the financial system: Bank Indonesia (BI), the Finance Ministry, the OJK and the Deposit Insurance Corporation (LPS), which also make up the governing board of the Financial System Stability Committee (KSSK).

The financial sector has indeed been facing tremendous pressure. Profitability and asset quality have been adversely affected by the pandemic-induced economic downturn.

Consumer sentiment and borrower repayment capacity have been weakened by lower incomes, thereby raising credit costs, hurting profitability.

Several economists have even expressed fears that this public health crisis could become the mother of all financial crises.

To avoid a domino-style collapse of the financial sector as businesses and individuals default on their loans wholesale, the Perppu expands BI's authority to give short-term, sharia-based liquidity credit not only to systemically important banks but all banks facing a liquidity crisis based on the OJK's assessment.

The Perppu authorises the LPS to issue bonds and to borrow from the government in exercising its broader mandate to cope with bank failures.

The government is even authorised to set up another deposit insurance company, besides LPS, in its efforts to maintain the financial sector's stability.

This new institution may be designed to insure non-bank financial institutions, which are still outside the LPS coverage.

Even though virtually all decisions on emergency credit and bank bailouts will be taken by the KSSK, of which highly respected and competent Finance Minister Sri Mulyani Indrawati serves as coordinator, we remain concerned over the absence of safeguards and a mechanism for political oversight against the risks of corruption, collusion and discriminatory practices in the granting of liquidity credit and bank bailouts.

Temptations and risks of such malfeasance could be big because the Perppu stipulates that KSSK executives and officials of the KSSK institutional members cannot be sued with criminal and civil charges for policy decisions taken under the Perppu, as long as they are fully in line with the standard operating procedures.

It is most imperative, therefore, that the detailed, technical regulations, which have yet to be issued by the President, BI, OJK, LPS and the Finance Ministry for the Perppu's enforcement, should stipulate high standards of transparency and accountability for the decision-making process.

The Jakarta Post is a member of The Straits Times media partner Asia News Network, an alliance of 24 news media organisations.

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