Fri, 28 Mar 2003

BI to implement tighter CAR requirements next year

The Jakarta Post, Jakarta

Bank Indonesia said on Thursday it would start implementing a ruling at the beginning of next year which would tighten the requirements for banks in calculating their financial health.

"The implementation will be gradual. This year, we're starting the probationary stage, with full implementation to commence next year," BI Governor Sjahril Sabirin told reporters, referring to the regulation which measures market risks to be included in calculating a bank's capital adequacy ratio (CAR). He added that the gradual introduction aimed to provide local banks time to adjust.

The ruling is geared to meet the standards of international banking best practices as set out by the Basle Committee.

Under the new ruling, the country's exchange rate and interest rates will be taken into account in calculating a bank's CAR -- a ratio which compares the bank's capital with its risk-weighted assets.

At present, the calculation of the CAR takes only credit risks into account.

The central bank has said that the new ruling was necessary, as it had been proven during the financial crisis that credit risks were not the only factor that could threaten a bank's capital, but currency movement and interest rates could also create a negative impact.

Sjahril admitted that the implementation of such a regulation could harm domestic banks, especially those with huge foreign exchange exposure and those holding fixed-rate government bonds. The movement of the central bank's interest rate would affect the earnings of those banks which hold fixed-rate government bonds.

"But we have taken into consideration all the possible impacts; this is why we want the implementation to be gradual," he said.

As of November last year, the CAR of Indonesian banks averaged 22 percent, well above BI's minimum requirement of 8 percent.