Draft on new CAR ruling expected by end of year<\/p>\n
Dadan Wijaksana, The Jakarta Post, Jakarta<\/p>\n
Bank Indonesia says it will move ahead with its plan to tighten
\nrequirements for banks in calculating their capital adequacy
\nratio (CAR), a policy which analysts said could lower banks CAR
\nlevels.<\/p>\n
Bank Indonesia senior official Wimboh Santoso said on
\nWednesday that a draft of the new ruling would be completed
\nbefore the end of this year.<\/p>\n
\"We're finalizing the proposal,\" Wimboh told a seminar on the
\nplanned new ruling.<\/p>\n
He was quick to add, however, that there would be a transition
\nperiod for banks to make some adjustments before the new ruling
\nbecame effective.<\/p>\n
Wimboh refused to give the specific time frame for the
\ntransition period, but said: \"In other countries, it usually
\ntakes around one or two years for transitional adjustments.\"<\/p>\n
Under the plan, banks will be required to include exchange
\nrate and interest rate risks in the calculation of CAR.<\/p>\n
CAR is the ratio between a bank's capital and risk-weighted
\nassets. The higher the CAR, the healthier the bank is.<\/p>\n
According to the current calculation method, the weighing
\nfactor refers mainly to lending risk. This means that a bank's
\nCAR would largely depend on the quality of its loan assets.<\/p>\n
\"But as proven during the (late 1990s financial) crisis,
\ncredit risk is not the only factor that can threaten a bank's
\ncapital, but also the movement in currency and interest rate.
\nThat's why we need to have those in the calculation of CAR,\" he
\nadded.<\/p>\n
Under the planned ruling, banks with heavy foreign exchange
\nexposure would be at risk of potential losses.<\/p>\n
Swings in the interest rate of the central bank SBI promissory
\nnotes would affect the banks' earnings from interest rate
\nmargins.<\/p>\n
Consequently, according to Wimboh, the new CAR ruling would
\npose a bigger threat to banks with large foreign exchange
\nexposure and holding fixed-rate government bonds.<\/p>\n
Analysts said that the new calculation method would lower the
\nCAR of most banks, which have already been struggling hard to
\nmeet the central bank minimum 8 percent CAR requirement.<\/p>\n
Last year, many banks barely passed the minimum requirement,
\nforcing some of them to merge with stronger banks, while others
\nhad to be shut down as their owners failed to inject fresh
\ncapital.<\/p>\n
Wimboh admitted such concerns, saying that's exactly why a
\ntransition period was needed in the first place, so as to provide
\nthem with enough time to take anticipatory steps.<\/p>\n
He said the plan to include market risk in the calculation of
\nCAR was part of international best banking practices as set by
\nthe Basle committee for international banking standards.<\/p>",
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