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Governments
urgently need to improve the regulatory framework and supervision of
the financial sector, a minister says, as loopholes in the financial
services industry led to the global economic crisis.
During the G20 meeting that concluded in London last week, Finance
Minister Sri Mulyani Indrawati said Monday there should be
“significant corrections” to supervision and regulation in
the financial sector to avoid the kind of “careless behavior and
excessive risk-taking” by those operating in the financial
services industry that triggered the economic crisis.
Such behavior has caused governments worldwide to spend
taxpayers’ money to bailout failing financial institutions to
avoid worsening global economic conditions.
“We realize that regulation and supervision of banks and non-bank financial institutions is really important.
“Players in the financial industry tend to be one step ahead of
regulators supervising them,” she told reporters on Monday.
“Indonesia supports this, particularly from the side of capital
reserves. A bank’s owner can put a small amount of capital and
attract enough funds from the people. Then there may be fraud.
“I think that in Indonesia, the 1997 Asian financial crisis and
the Bank Century case have shown that regulations in the banking sector
and capital markets should be improved,” she said.
The Deposit Insurance Corporation (LPS) revived Bank Century, which
almost collapsed in November last year, by injecting Rp 6.76 trillion
in funds, to avoid what the central bank said was a potential systemic
threat to the Indonesian economy.
Some analysts and lawmakers have questioned the central bank’s
weak supervision of Bank Century, with the Supreme Audit Agency (BPK)
now auditing the lender for a possible misuse of state funds.
During the G20 meeting, finance chiefs agreed to force banks to
“claw back” cash awards if earnings faltered, to better tie
compensation to long-term performance and base pay, to defer payments
and to increase the disclosure of payments to bank executives, said a
Sept. 5 statement reported by Bloomberg.
Banks will also have to curb leverage and raise the amount and quality of assets they keep in reserve once growth takes hold.
The Financial Stability Board (FSB) will determine whether there needs
to be a limit on bonuses as a percentage of a bank’s profits to
its executives.
“First, regulations need to be perfected. Then the capacity of supervision needs to be improved,” said Mulyani.
She also said there would be a structure and methodology to determine the maximum salary of bank executives.
Critics have said that greed is the main reason behind the financial
crisis as bank executives competed to raise profits without good
governance.
The G20 summit will be held on Sept. 24 to 25 in Pittsburgh and heads of states are set to attend.
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