BI says no plan yet to boost minimum CAR requirement

BI says no plan yet to boost minimum CAR requirement

The Jakarta Post, Jakarta

Bank Indonesia Governor Sjahril Sabirin said on Thursday that
the central bank had no plans to boost the minimum capital
adequacy ratio (CAR) requirement for banks to 12 percent from the
current 8 percent level.

"We have not made any plans to increase the (minimum) CAR
requirement to 12 percent," he told Antara on the sidelines of a
hearing with the House of Representatives Commission IX for
financial and development planning affairs.

Sjahril was responding to an appeal made by top bankers to the
central bank not to quickly apply the higher CAR requirement on
the grounds that domestic banks were still struggling to recover
from the effects of the devastating late 1990s financial crisis.

The bankers said that raising the minimum CAR requirement
would virtually prevent banks from resuming lending, which was
important in boosting banks' profitability and critical in
helping push economic growth.

Chairwoman of the National Private Banks Association
(Perbanas) Gunarni Soeworo said that local banks, whose assets
were mostly in the form of risk-free government bonds, needed at
least another three to four years to be able to meet the 12
percent CAR requirement.

CAR is the ratio between capital and risk-weighted assets.
The higher the CAR the stronger the bank is.

The 12 percent minimum CAR requirement is an international
standard as stated under the Basle Accord.

Sjahril, however, said that the central bank would proceed
with plans to gradually adopt other international banking
principles under the Basle Accord.

He did not provide details.

But central bank officials have previously said that it was
determined to issue a new ruling for banks in calculating the CAR
level before the end of this year.

Under the new plan, banks would be required to include the
exchange rate and interest rate risks in the calculation of the
CAR.

According to the current calculation method, the weighing
factor in the calculation of the CAR refers mainly to the lending
risk. This means that a bank's CAR would depend largely on the
quality of its loan assets.

But as proven during the late 1990s financial crisis, the
credit risk is not the only factor that can threaten a bank's
capital, but also movements in the currency and interest rates.
This is the reason why the two other risks must be included in
the CAR calculation.

Under the planned ruling, banks with heavy foreign exchange
exposure would be at risk of potential losses. Swings in the
interest rate of the central bank SBI promissory notes would
affect the banks' earnings from interest rate margins.
Consequently, the new CAR ruling would pose a bigger threat to
banks with large foreign exchange exposure and holding fixed-rate
government bonds.

Analysts said that the policy could lower the banks' CAR
levels.

But Bank Indonesia said that there would be a transition
period for banks to make some adjustments before the new ruling
took effect.