BI’s interim head of legal department Amsal Chandra Appy testifying at a judicial review hearing of Law on Financial Sector Development and Reinforcement, Monday (10/28/2024). Photo by MKRI/Ifa.
JAKARTA (MKRI) — At a judicial review hearing of Law No. 4 of 2023 on the Financial Sector Development and Reinforcement (P2SK Law) for case No. 85/PUU-XXII/2024 on Monday, October 28, 2024, interim head of the legal department of Bank Indonesia (BI) Amsal Chandra Appy explained the characteristic differences between short-term liquidity loans (PLJP) and funds placement by the Deposit Insurance Corporation’s (LPS).
The case was filed by two lecturers and one university student. They believe there is potential constitutional impairment due to the enforcement of Article 7 points 6 of the P2SK Law, which authorize the LPS to be able to place funds in banks under restructuring based on requests from the Financial Services Authority (OJK), which could potentially overlap with the authority of Bank Indonesia (BI) as the lender of last resort.
Amsal explained that banks receiving PLJPs are generally still under normal supervision where they are still solvent and their liquidity difficulties are more due to mismatch (not fundamental liquidity issues). Meanwhile, LPS funds are placed in restructuring banks facing a potential disruption of capital adequacy and/or more severe liquidity issues, i.e. fundamental liquidity difficulties, which without any intervention could lead to insolvency.
“Therefore, LPS actively participates in maintaining financial system stability in accordance with its authority to place funds as a form of early intervention aimed at minimizing risk if the bank then prepares for resolution,” Amsal explained at the session set to hear the testimonies of BI, LPS, and OJK as Relevant Parties in the case.
He said that BI has served as the lender of the last resort (LoLR) through PLJP, which is based on a strong legal basis and the theory of LoLR where liquidity assistance is provided to solvent financial institutions subject to high penalty rates to prevent arbitrage and must be supported by high-quality collateral to reduce moral hazard. In addition, BI also has other liquidity facilities such as the intraday liquidity facility (FLI), repos in the context of open market operations, and lending/financing facilities. BI can also assist LPS liquidity difficulties through repo/purchase of LPS-owned government bonds (SBN) if LPS estimates that it will or has experienced liquidity difficulties.
LPS’ Authority to Place Funds
Meanwhile, LPS legal executive director Ary Zulfikar said that the authority to place LPS funds has been regulated since Law No. 2 of 2020 on the Stipulation of Government Regulation in Lieu of Law No. 1 of 2020 on State Financial Policy and Financial System Stability for Handling the 2019 Corona Virus Disease Pandemic and/or in the Context of Facing Threats that Endanger the National Economy and/or Financial System Stability into Law in conjunction with Government Regulation No. 33 of 2020 on the Implementation of the LPS’ Authority in the Context of Implementing Steps to Handle Financial System Stability Problems. The LPS’ fund placement authority is to anticipate banks that are experiencing liquidity difficulties but do not qualify for PLJP and PLJPS from Bank Indonesia as a result of Covid-19.
However, the LPS’ fund placement during Covid-19 did not occur. This proves that the joint preventive measures between the Ministry of Finance, BI, OJK, and LPS during Covid-19 were good and effective to maintain banking stability.
After the Covid-19 pandemic, the House of Representatives (DPR) proposed an initiative to develop and strengthen the financial sector, by submitting the P2SK Bill to the Government. One of the LPS’ institutional reinforcement (along with OJK) is the fund placement authority in banks under restructuring (BDP). This policy is part of the early involvement action to minimize risk to prevent bank failure. Thus, the fund placement authority is part of the financial system safety net.
“The design of LPS fund placement must be based on OJK’s request after OJK has analyzed the bank’s feasibility. This is different from BI’s lender of last resort in the form of PLJP or PLJPS, which is based on directly request by bank to BI,” said Ary.
He said the challenge in the implementation of the LPS’ fund placement authority is adequate collateral that the bank can give to LPS, considering that it is one of the requirements for PLJP/PLJPS from BI. If the bank cannot provide collateral, the bank or its shareholders will also have difficulty meeting the collateral requirements for guaranteeing the funds.
“LPS should not be allowed to provide liquidity to banks that are in recovery, because liquidity assistance at this stage is BI’s responsibility. And therefore, there must be clear arrangements between LPS and BI on the authority to provide liquidity to banks under restructuring,” Ary explained.
In addition, OJK’s deputy commissioner for law and investigation Yuliana also emphasized that BI, OJK, and LPS are independent institutions with different functions that should not be overlapping. In the Financial System Stability Committee (KKSK), OJK is the regulatory and supervisory authority related to prudence and integration in the financial services sector. It functions as the first safety net in maintaining financial system stability.
Then, since the enactment of the P2SK Law, which gives LPS voting rights, the voting rights have become even so there could potentially be a deadlock. Therefore, the P2SK Law added the KSSK’s decision-making mechanism by authorizing the Minister of Finance as the coordinator to make decisions in the event of a tie.
“There is a decision-making mechanism in the KSSK where LPS has a voting right and the Minister of Finance can make decisions when a consensus is not reached,” said Yuliana.
The KSSK decision-making forum is also a form of checks and balances between OJK, BI, LPS, and the Ministry of Finance on all forms of implementation of the handling of systemic bank problems, both in financial system stability and in a financial system crisis, which are the KSSK’s main tasks and functions. In other words, the check-and-balance function against independent institutions is also attached to the implementation of financial system stability issues, not just to the budget. The checks and balances on the OJK budget is realized in the form of the House’s approval, which will be described in the next section.
In addition to the KSSK, checks and balances also apply through coordination between BI, OJK, and LPS. Coordination includes macro-prudential, micro-prudential, and bank problem handling policies (vide Article 15A in Article 276 point 1 of the P2SK Law).
Finance Minister’s Role
Meanwhile, Deputy Chief Justice Saldi Isra expressed his views on the statements by BI, OJK, and LPS. He stated that BI was in a clear position to reject the Petitioners’ entire argument. Meanwhile, he added, OJK implied that the Minister of Finance’s authority to approve the LPS’ operational annual work plan and budget (RKAT) interfered with independence, although in the end OJK rejected the petition regarding the placement of LPS funds. Then, LPS endorsed the petition submitted by the Petitioners, although it was not explicit in the statement submitted by LPS at today’s hearing.
Therefore, Deputy Chief Justice Saldi requested additional truthful explanations from BI, OJK, and LPS on the authority of the Minister of Finance stipulated in the articles being reviewed, so that the Court would not make a mistake in making a decision on the case.
“How far can the Minister of Finance’s role related to what is requested by these Petitioners be justified, or how far can it not be? Please explain. No need to hesitate, just explain it,” he said.
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The Petitioners—two lecturers and one university student—challenge Article 7 points 6 and 57; Article 86 paragraphs (4), (6), and (7) letter a; and Article 276 points 3, 13, and 24 in Law No. 4 of 2023 on the Financial Sector Development and Reinforcement (P2SK Law). Giri Ahmad Taufik (Petitioner I) is a constitutional law lecturer at Djuanda University in Bogor while Wicaksana Dramanda (Petitioner II) is a constitutional law lecturer at the Islam University of Bandung. Mario Angkawidjaja (Petitioner III) is a university student and customer of microcredit bank (BPR) Nusantara Bona Pasogit (NBP) 31 Jatinangor.
They argue that there is potential constitutional impairment due to the enforcement of the articles, which authorize the LPS to be able to place funds in banks under restructuring based on requests from the Financial Services Authority (OJK), which could potentially overlap with the authority of Bank Indonesia (BI) as the lender of last resort. In addition, the Petitioners believe government intervention in the form of the Minister of Finance’s approval of the LPS annual work plan and budget in these articles raises legitimate doubts on the customers’ side regarding the legal certainty that the LPS will exercise its authority professionally and based on expertise alone, without political interference. Although independence has accountability limits, the Minister of Finance’s approval authority in these provisions lacks the basis of necessity and balancing.
In their petitums, the Petitioners request that the Court nullify Article 7 points 57 of Law No. 4 of 2023, which amends the phrase “to obtain approval” in Article 86 paragraph (4) of Law No. 24 of 2004; and the phrase “who has obtained the approval of the Minister of Finance” in Article 86 paragraph (7) letter a of Law No. 24 of 2004. In addition, they request that Article 7 point 6 and Article 276 point 13 be declared unconstitutional and not legally binding.
Author : Mimi Kartika
Editor : Nur R.
PR : Fauzan F.
Translator : Yuniar Widiastuti (NL)
Disclaimer: The original version of the news is in Indonesian. In case of any differences between the English and the Indonesian versions, the Indonesian version will prevail.
Monday, October 28, 2024 | 15:43 WIB 109