Indonesia regulator delay creates uncertainty among banks

By Rachel Armstrong

SINGAPORE, Jan 24 (Reuters) - A political deadlock
surrounding the establishment of Indonesia's new financial
regulator may slow some banks' investment decisions and raises
concerns it could weaken regulatory co-ordination across
Southeast Asia.

The bill to establish the new regulator, which will be
called the OJK, was meant to have been passed by Indonesia's
parliament before the end of 2010. However, disagreements over
how the OJK's board of commissioners are appointed meant
lawmakers missed the deadline.

The country's parliament has been in session for two weeks
since its year-end holiday, but still no firm date is known for
when the bill will be debated again or eventually passed. Now
bankers say the delay is creating uncertainty and slowing down
the approval process for some investment decisions.

"What's causing discomfort is the delay," said the head of
one foreign bank operating in the country, who declined to be
identified because of the sensitivity of the matter.

"While the long-term economic fundamentals don't change our
growth plans, if we want a quick turnaround on a decision to
invest more in the country this delay is slowing down the
approval process for that," he added.

The OJK, which is expected to be similar to the UK's
Financial Services Authority, is meant to take over supervision
of the banking, brokerage and fund management sectors from the
country's central bank and capital market watchdog Bapepam-LK.

However, Bank Indonesia (BI) has been reluctant to cede its
supervisory role, saying an external regulator would make it
tougher to organise a co-ordinated response during a financial
crisis. Meanwhile the government and parliament are disagreeing
over who should get to choose the nine commissioners on the
OJK's board.

"We have not started discussing it again. It is unlikely
that it will resume this month," said Harry Azhar Azis, a member
of the parliament's finance commission.

"There are some disagreements between the government and the
parliament, and if we cannot reach a consensus, there is a
possibility the bill could be dropped," he added.

Fauzi Ichsan, senior economist and head of government
relations for Standard Chartered Bank in Indonesia, said the
deadlock was not only between BI and the government but more
importantly between the BI and government on one side and
parliament on the other.

"The perception among civil servants and central bankers is
that parliament is politicizing this venture, it's scaring both
BI and ministry of finance officials," Ichsan said.

The separation of regulators in Indonesia jars with the
trend in regulation across most other economies.

The UK is scrapping the Financial Services Authority and
returning bank supervision to the central bank next year while
other major Southeast Asian countries all keep bank supervision
within their central banks.

"If in Indonesia the job was split then it may complicate
the process of economic integration and issues like that," said
Standard Chartered's Ischan.

The IMF warned in its financial stability report on
Indonesia in September last year that the planned regulatory
overhaul is a risky move. Transferring bank supervision out of
BI risks losing competencies that have been built over time and
so entails significant risk, the report said, advising that the
existing framework should be retained and strengthened.

Bankers say they are also worried about whether the
government has a clear plan on the transition.

"The concern I have is not about the form but the substance
of how do we ensure that there is supervisory expertise within
the OJK if the OJK becomes a separate entity from BI," said the
head of the foreign bank.

(Additional reporting by Olivia Rondonuwu and Aditya Suharmoko
in JAKARTA; Editing by Neil Chatterjee)