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Siregar and James, Designing an Integrated Financial Supervision Agency

Siregar and James, Designing an Integrated Financial Supervision Agency

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Having initiated reforms in the financial sector in late 1997, the government of Indonesia also introduced a new Central Bank Independence Act in early 1999. The next task for the government is to devise a safety net system for the financial sector, which includes the possibility of establishing an integrated financial sector supervisory agency. This study draws essential lessons from the experiences of other countries to highlight a number of key challenges facing Indonesia in designing its integrated financial sector supervisory agency, especially at the early stages.
Having initiated reforms in the financial sector in late 1997, the government of Indonesia also introduced a new Central Bank Independence Act in early 1999. The next task for the government is to devise a safety net system for the financial sector, which includes the possibility of establishing an integrated financial sector supervisory agency. This study draws essential lessons from the experiences of other countries to highlight a number of key challenges facing Indonesia in designing its integrated financial sector supervisory agency, especially at the early stages.

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Published by: Muhammad Arief Billah on Jun 15, 2009
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10/11/2012

 
ASEAN Economic Bulletin98Vol. 23, No. 1, April 2006
 ASEAN Economic Bulletin Vol. 23, No. 1 (2006), pp. 98–113
ISSN 0217-4472 print / ISSN 1793-2831 electronic© 2006 ISEASDOI: 10.1355/ae23-1g
Designing an Integrated FinancialSupervision Agency
Selected Lessons and Challenges for Indonesia
Reza Y. Siregar and William E. James
 Having initiated reforms in the financial sector in late 1997, the government of Indonesia alsointroduced a new Central Bank Independence Act in early 1999. The next task for thegovernment is to devise a safety net system for the financial sector, which includes the possibility of establishing an integrated financial sector supervisory agency. This study drawsessential lessons from the experiences of other countries to highlight a number of keychallenges facing Indonesia in designing its integrated financial sector supervisory agency,especially at the early stages.
Keywords:
unified financial sector supervisory agency, bancassurance, central bank, Indonesia.
I.Introduction
With the creation of new financial instruments andservices offered by various financial institutions,countries have found that boundaries between thedifferent types of financial institutions such asbanking, securities, and insurance have blurred(Taylor and Fleming 1999). In their study of fourteen countries, Martinez and Rose (2003)found that at the end of 2001, the market shares of financial conglomerate in the banking sector, thesecurities industry, and the insurance industryhad significantly and rapidly climbed to around71 per cent, 63 per cent, and 70 per cent,respectively.
1
The increasing presence of financialconglomerates is also highly visible in majorSoutheast Asian economies.
2
The role of 
bancassurance
(whereby commercial banksactively distribute insurance products as well)has seen a phenomenal growth as a result of broad-based financial deregulation in a largenumber of Asian economies. By 2006,
bancassurance
can potentially account for 13 percent of total premiums collected in Asia’s lifeinsurance sector, and 6 per cent of the non-lifeinsurance sector (Sigma 2002).As in neighbouring economies, the commercialbanks in Indonesia have also been permitted toplay active roles in the security and insurancesectors (Table 1). While at present financialconglomerates in Indonesia are arguably still in anearly stage, they are by no means insignificant. Byend 2003, it is estimated that at least ten banks
 
ASEAN Economic Bulletin99Vol. 23, No. 1, April 2006
TABLE 1Permissible Activities for Banking Organizations in Various Financial Centres(Directly or Through Subsidiaries of the Bank)
 Bank Investment CountrySecurities
a
 Insurance
b
 Real Estate
c
in Industrial Firms
d
IndonesiaPermittedPermittedNot permittedNot permittedMalaysiaPermittedPermittedN/APermitted but restrictedPhilippinesPermitted for bothPermitted for bothPermitted withPermitted with limitationsuniversal anduniversal andlimitations forfor universal banks onlycommercial bankscommercial banksuniversal bankswith limitationswith limitationsonlyThailandPermittedPermittedPermittedPermitted but restrictedSingaporeBanks may holdLocallyLimited in theInterests in the excess oequity participationincorporatedaggregate to10%, or that give thein stockbrokeringbanks may own20% of banksbank significant influencefirms with MASinsurancecapitalover the management of aapprovalcompanies withcompany, requireMAS approvalregulatory approval. Inaddition, a bank may notinvest more than 2% of its capital funds in anyindividual firm.
N
OTES
: N/A = No information is available yet (to be confirmed).a. Securities activities include underwriting, daling and brokering all kinds of securities and all aspects of the mutualfund business.b. Insurance activities include underwriting and selling insurance principal and as agent.c. Real estate activities include real estate investment, development and management.d. Including investments through holding company structures.S
OURCES
: Claessens (2002); Bank of Thailand Reports (various years); Bank of Indonesia (various reports), Milo(2004).
deliver
bancassurance
with a potential market of around Rp14 trillion, and at least fifteen banksoffer mutual funds, mostly based on governmentbonds (see Hidayat 2003, and Table 2). It isestimated that up to June 2003, around 85 per cent(or roughly Rp58 trillion) of the mutual fundswere sold via banking institutions.As the role of financial conglomerates continuesto rise, concerns become more apparent overthe effectiveness of multiple regulatory andsupervisory agencies (Taylor and Fleming 1999,Mwenda and Fleming 2001, and Claessens 2002).At the end of 2002, Martinez and Rose (2003)reported that at least twenty-two countries haveadopted a fully integrated supervisory agency, andtwenty-four countries have partially unifiedthe supervision of two types of financialintermediaries (Table 3). The Scandinavianeconomies (namely, Denmark, Norway andSweden) were the first to establish their integratedsupervision agencies starting between 1986 and1991.
3
The creation of the Financial SupervisoryAuthority in the United Kingdom was announcedin 1997. As a consequence of Korea’s

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