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Indonesia’s Financial Services Authority – OJK Tighter banking regulations to curb risky practices and enhance oversight

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Jakarta, IO – Following the March 2023 banking crisis in the US and Switzerland, financial regulatory authorities in the two countries strengthened their efforts to improve the quality of bank management by their administrators, from top management to lower-level staff. 

The failure of three small- to mid-sized US banks (Silicon Valley Bank, Signature Bank and First Republic Bank) and the collapse of Credit Suisse, the second-largest bank in Switzerland, have made policymakers in the banking sector aware of the need to review and at the same time reorganize the latest systems and procedures to mitigate risks in the banking industry, both internally and externally. 

The same measures were also taken by the banking authorities in Indonesia – the Financial Services Authority (OJK) – which since its establishment in 2011 has continued to expend various efforts to improve regulations, aimed at building sufficient financial system stability so that the financial services industry can make a significant contribution to the national economy. 

This was undertaken as a follow-up to the Law 4/2023 concerning financial sector development and strengthening (PPSK Law) which regulates the financial sector ecosystem, including a wide array of entities from banking, insurance, guarantees, pension funds, provident funds, capital market, money market, foreign exchange market, bullion market, financing institutions, venture capital, micro-finance institutions, financial cooperatives, fintech, etc. 

The PPSK Law seeks to reform the financial sector by pressuring institutions to develop and strengthen the industry through macro-prudential and micro-prudential policies, as well as enhancing oversight of financial institutions by the OJK, Bank Indonesia (BI), Deposit Insurance Corporation (LPS), and Finance Ministry as members of the Financial System Stability Committee (KSSK). The ultimate objective is of course to maintain public trust and market confidence, which in turn will contribute to sustainable economic growth. 

Lessons from global banking turmoil 

Fifteen years ago (in 2009, to be exact), the world was shocked by the sudden failure of IndyMac Bank, a California bank that had grown into one of the largest US mortgage lenders. Two months later, the US$ 309 billion Washington Mutual Bank collapsed, marking the start of a devastating recession. Fast forward to 2023: there were a series of bank collapses in the US, prompting the question: is the US teetering on the brink of yet another financial crisis? 

The answer to this question is complicated. Many banks are invested in a mix of property portfolios, and the decision by the US central bank – The Federal Reserve (the Fed) – to push interest rates higher (from 0.5 percent to a current 5.5 percent) has led to market uncertainty. 

But this does not necessarily mean that a crisis is impending. With careful risk management, effective supervision and regulation, the financial sector can navigate a changing financial landscape successfully. 

Many analysts argue that bank failures are part of the natural course of business. While the number of failed banks in the US in 2023 has raised alarms, these incidents have been caused by several factors. 

The collapse of banks such as Silicon Valley Bank and First Republic Bank, were the result of deficiencies in risk management and a lack of proactive oversight, and were not related to the bad loan practices of the 2008 subprime mortgage crisis. 

While the future is never certain, we can say for sure that interest rate hikes have created liquidity challenges on both the asset and liability sides of banks’ balance sheets. This shift could pose significant challenges for banks around the world, and lead to reduced profitability and increased consolidation within the industry, through mergers and acquisitions. 

The US and Switzerland are not alone. China also has its own share of bank failures. Overexposure to the property sector has devastated the banking sector in China. This naturally begs the question: does it pose a systemic risk? 

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