BI plans new ruling on CAR this year

Berni K. Moestafa, The Jakarta Post, Jakarta

By the end of 2002, Bank Indonesia wants local banks to include currency and interest rate swings as risk factors weighing against their capital adequacy ratios (CAR), according to a senior central bank official on Monday.

Bank Indonesia senior bank researcher Wimboh Santoso said a ruling on the new CAR policy was due to come out by year's end.

He also denied a report by The Jakarta Post quoting a senior official at the Indonesian Bank Restructuring Agency (IBRA) as saying last week that Bank Indonesia would raise the minimum CAR level to 12 percent from eight percent currently.

"Instead of raising the CAR level this year, we plan to tighten CAR requirements by including the market risks," he told reporters.

Wimboh said that risks of foreign exchange losses, and lower interest earnings should be taken into account when gauging a bank's healthiness through its CAR level.

CAR is the ratio of a bank's capital against its risked weighted assets, most of which are loans. Bank Indonesia shuts down banks that fail to meet the CAR requirement.

"Thus far we have been measuring only the credit risks in a bank's CAR," Wimboh said, adding that the new ruling would include risks on the capital side of a bank's CAR.

For example, he said, banks with U.S. dollar time deposits but rupiah interest rates were at risk of foreign exchange losses. That risk should be reflected on a bank's CAR.

Swings in Bank Indonesia's benchmark rates poses another risk as they affect bank earnings from the interest rate margins.

Wimboh said banks with foreign exchange exposure and those stuck with government bonds carrying fixed rates would face greater pressure under the new CAR ruling.

But for now, he said, it was too early to issue the ruling.

According to him, a number of local banks would not meet the requirements and would be closed down if the central bank applied the planned ruling now.

"We've told them about this plan and they should be taking steps by now to anticipate it," he said.

Bank Indonesia however would likely offer banks some time to cope with the new ruling after issuing it, he added.

He said the plan to include market risk in the calculation of CAR levels was part of international best banking practices as set by the Basle committee for international banking standards.

The central bank has been pushing banks to comply with Basle's practices to bring the industry up to the level of international standards.