When Politics Enters Financial Oversight, Markets Exit: Why Independence of Otoritas Jasa Keuangan Matters More Than Ever

By Sigit Pramono, Member of the Honorary Council of Perbanas, Former senior banking executive in Indonesia and ASEAN; former Chairman of the Indonesian Bankers Association.

In financial markets, credibility is not declared—it is priced. Investors do not wait for policy outcomes to judge institutions; they respond to signals. One of the strongest signals is the distance between politics and financial oversight. When that distance narrows, risk premiums widen.

Recent public debates in Indonesia about the possible appointment of politicians to senior roles in financial authorities raise a question that goes far beyond personalities or legal formalities. The issue is structural: what happens to market confidence when political logic enters institutions designed to operate on prudence, continuity, and long-term risk management?

From the perspective of someone who has lived through multiple financial cycles—calm periods and crises alike—the lesson is consistent.

Markets reward institutional restraint and punish ambiguity. Independence is not an abstract principle; it is a daily input into pricing decisions.
Central banks and financial supervisors are expected to think in decades, not election cycles.

Their most important decisions are often unpopular in the short term: tightening liquidity, forcing early recognition of losses, intervening in weak institutions before problems become visible. These actions require insulation from short-term political bargaining.

Once that insulation is perceived to weaken, markets immediately reassess risk—even if no policy has changed yet.

This is why recent market reactions to developments at Bank Indonesia matter. The debate was not about individual competence; it was about institutional meaning.

Currency pressure and equity market volatility reflected a reassessment of governance risk—the perception that the boundary between politics and monetary authority had become less clear. Markets acted not on ideology, but on probability.
History explains this sensitivity.

Indonesia’s 1997–1998 crisis was not caused solely by macroeconomic imbalances. It was magnified by politicized decision-making within the financial system, where supervisory discipline weakened under pressure and corrective action came too late.

The aftermath was severe: bank failures, closures, state takeovers, and a long-lasting fiscal burden. Institutionally, the response was equally dramatic. Banking supervision was removed from the central bank and entrusted to a new, independent authority—what later became OJK—while new laws reinforced the autonomy of the central bank.

These reforms were not cosmetic. They represented a hard-earned consensus: financial stability requires regulators that are insulated from political negotiation. Independence was designed as a safeguard for society, not as a privilege for technocrats.

That is why any perception of political encroachment into financial supervision today carries outsized consequences. OJK does not oversee a single market segment; it supervises the entire financial services ecosystem.

If the independence of such an institution is questioned, the signal sent to global investors is unambiguous: regulatory outcomes may become contingent on political dynamics. The immediate response is higher risk premiums, increased volatility, and a more cautious allocation of capital.

From an international perspective, this is not an Indonesian peculiarity. The lesson is universal. Countries that successfully navigated crises—whether in Asia, Europe, or Latin America—did so by strengthening, not diluting, the independence of their financial institutions.

Where politics dominated oversight, crises tended to recur. This is why the debate should be reframed. It is not about excluding individuals from public service. It is about preserving institutional roles.

Politicians belong in the arena of representation and legislation. Financial regulators belong in a different space—one governed by continuity, technical judgment, and long-term system stability.

Indonesia has made significant progress in building a credible financial governance framework. That credibility is now an asset. Undermining it would be costly and unnecessary. Markets have already shown how quickly they react to ambiguous signals.

The choice is therefore clear. If Indonesia wants to prevent recurring financial crises and maintain its standing in global markets, it must protect the independence of its central bank and financial supervisors with consistency and discipline.

Credibility, once lost, is expensive to rebuild.
History has delivered its warning. Markets have delivered their signal. The remaining question is whether policy will respond with restraint—or invite a repricing that no one truly wants.