BI to implement tighter CAR requirements next year

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.