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A bridge too far; the strive to establish a financial service regulatory authority (OJK) in Indonesia

Author

Listed:
  • Pradiptyo, Rimawan
  • Rokhim, Rofikoh
  • Sahadewo, Gumilang Aryo
  • Ulpah, Maria
  • Sasmitasiwi, Banoon
  • Faradynawati, IAA

Abstract

The Government of Indonesia (GOI) has been proposing a draft act on financial service regulatory authority, called Otoritas Jasa Keuangan (OJK hereafter). In the aftermath of 1998 Asian crisis, the establishment of the institution was mandated through Bank Indonesia Act (Indonesia’s central bank bill) in 1999, which was later updated in 2004. According to the draft act, the OJK has been designed using an integrated approach, which is similar to the arrangement of FSA in the UK. This paper aims to examine the feasibility of establishing OJK. The existing financial supervision suffers from several problems: a) the quality of supervisions tend to be heterogeneous among the financial supervision bodies, b) there is a gap in supervision, whereby thousand of non-banking financial institutions have not been supervised properly, and c) financial offences have been flourishing in inter market transactions. We found that the establishment of OJK, however, would not minimize, let alone, resolve the problems above. The draft act has not proposed a mechanism on how to address these very issues. We estimated the minimum irreducible costs of establishing and operating OJK and found that the costs are paramount. According to the draft act, the costs would burden all financial institutions and obviously this creates complexity in financing OJK. Finally, two alternative approaches have been proposed in order to improve the feasibility and the effectiveness of the OJK by considering the structure of financial sector supervision in Indonesia.

Suggested Citation

  • Pradiptyo, Rimawan & Rokhim, Rofikoh & Sahadewo, Gumilang Aryo & Ulpah, Maria & Sasmitasiwi, Banoon & Faradynawati, IAA, 2011. "A bridge too far; the strive to establish a financial service regulatory authority (OJK) in Indonesia," MPRA Paper 32004, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:32004
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    References listed on IDEAS

    as
    1. Claudio Borio, 2011. "Implementing the Macroprudential Approach to Financial Regulation and Supervision," Chapters, in: Christopher J. Green & Eric J. Pentecost & Tom Weyman-Jones (ed.), The Financial Crisis and the Regulation of Finance, chapter 7, Edward Elgar Publishing.
    2. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    3. Richard K. Abrams & Michael W Taylor, 2000. "Issues in the Unification of Financial Sector Supervision," IMF Working Papers 2000/213, International Monetary Fund.
    4. Thomas M. Hoenig, 2004. "Exploring the macro-prudential aspects of financial sector supervision," Economic Review, Federal Reserve Bank of Kansas City, vol. 89(Q II), pages 5-17.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Financial sector regulatory authority; supervision framework design; feasibility study;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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