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

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.