Draft on new CAR ruling expected by end of year
Dadan Wijaksana, The Jakarta Post, Jakarta
Bank Indonesia says it will move ahead with its plan to tighten requirements for banks in calculating their capital adequacy ratio (CAR), a policy which analysts said could lower banks CAR levels.
Bank Indonesia senior official Wimboh Santoso said on Wednesday that a draft of the new ruling would be completed before the end of this year.
"We're finalizing the proposal," Wimboh told a seminar on the planned new ruling.
He was quick to add, however, that there would be a transition period for banks to make some adjustments before the new ruling became effective.
Wimboh refused to give the specific time frame for the transition period, but said: "In other countries, it usually takes around one or two years for transitional adjustments."
Under the plan, banks will be required to include exchange rate and interest rate risks in the calculation of CAR.
CAR is the ratio between a bank's capital and risk-weighted assets. The higher the CAR, the healthier the bank is.
According to the current calculation method, the weighing factor refers mainly to lending risk. This means that a bank's CAR would largely depend on the quality of its loan assets.
"But as proven during the (late 1990s financial) crisis, credit risk is not the only factor that can threaten a bank's capital, but also the movement in currency and interest rate. That's why we need to have those in the calculation of CAR," he added.
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, according to Wimboh, 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 new calculation method would lower the CAR of most banks, which have already been struggling hard to meet the central bank minimum 8 percent CAR requirement.
Last year, many banks barely passed the minimum requirement, forcing some of them to merge with stronger banks, while others had to be shut down as their owners failed to inject fresh capital.
Wimboh admitted such concerns, saying that's exactly why a transition period was needed in the first place, so as to provide them with enough time to take anticipatory steps.
He said the plan to include market risk in the calculation of CAR was part of international best banking practices as set by the Basle committee for international banking standards.