BI plans new ruling on CAR this year

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.