Journal of Indonesian Economy and Business Volume 26, Number 1, 2011, 10 – 24 THE POLITICS OF BANK SUPERVISION Widigdo Sukarman Universitas Gadjah Mada and Universitas Negeri Manado (
[email protected]) ABSTRACT The bank supervision function and efficacy of monetary policy are often a trade-off for the central bank. An increasingly integrated financial system and the occurrence of bank crises during the 1980s raised the question: are central banks efficient in overseeing banks and is there a requirement for integrated supervision, either under the central bank or separate? The debate among academics and policymakers has never been settled without the guarantee that one alternative will ensure optimal bank supervision. This development has led to periodic changes in the form of supervision chosen. As the basic economic choice has been unsatisfactory, this study approaches the problem using path-dependence theory, which observes historical factors of bank development as well as the constellation of domestic politics in choosing these alternatives. Keywords: path-dependence, bank supervision, politics, country-specific INTRODUCTION Economic development, which changed rapidly among industrial countries during the Why are banks so special? Banks occupy second half of the 20th century, led to a special place in the economy because of their integrated bank, securities and insurance ability to transform short-term savings, which institutions and, therefore, the emergence of constitute public assets, into long-term loans. financial conglomerates. This situation Furthermore, banks also effectuate the necessitated a response in terms of financial payment system of a country and between reforms that would bring changes in countries. In the event of a bank rush, the bank institutionalization, competition and innova- cannot readily conduct a reverse transforma- tion in products and services such as tion, thereby triggering a liquidity crunch, securitization.