New CAR ruling to be applied to 40 banks next year

New CAR ruling to be applied to 40 banks next year

Dadan Wijaksana, The Jakarta Post, Jakarta

Bank Indonesia said on Wednesday that a new, tougher regulation
with regard to bank capital would only be applied to 30 to 40
banks starting next year, while smaller banks would still have
two years to prepare for it.

Bank Indonesia director for bank supervision Aris Anwari said
that the banks to be immediately affected by the regulation were
mostly those with assets of more than Rp 10 trillion (US$1.12
billion) and considered to be "systemically important banks"
(SIBs).

"I think around 30 to 40 banks will have to conform to the new
ruling," he said.

Aris did not provide a definition of what an SIB bank was, but
a bank should be considered as systemically important if its
operations were quite large and it had an influence on the
overall banking industry.

Included in this group are banks with very large assets, a
large number of employees and plenty of branches, such as Bank
Mandiri and Bank Central Asia (BCA).

Aris was quick to add, however, that among the first banks to
be affected by the new ruling would also be banks with assets
below Rp 10 trillion, but having a large portion of long- and
short-term bonds in their assets, as well as banks with active
foreign exchange transactions.

The new ruling requires banks to include market risks like
interest rate and foreign exchange movements in the calculation
of their capital adequacy ratio (CAR).

Under the current regulations, CAR is essentially a ratio
between a bank's capital and risk-weighted assets, mainly
lending: The higher the CAR, the healthier the bank.

Implementation of tougher CAR rules would automatically lower
the CAR of banks.

The central bank has said that the new rules are aimed at
bringing into adoption the international practice set out by the
Basle Committee for international banking practice.

However, concern has been expressed that some banks might
suffer a significant reduction in their CAR if the new method of
calculation were adopted.

The central bank has required that banks must have a minimum
CAR of 8 percent. Failure to comply would force the bank to be
closed down or merged with healthier ones.

Many local banks had to be shut down following the late 1990s
financial crisis, as their CAR had dropped into negative
territory. Others managed to survive the crisis only after an
expensive government bailout.

Aris said that, based on the central bank's estimate, the new
CAR ruling would cause a CAR reduction only of up to 1.5 percent.

Bank Indonesia has stated the new ruling is needed as it has
been proven that during the crisis, lending risks were not the
only factor that could threaten a bank's capital, but also swings
in exchange rate and interest rate.

As part of an anticipatory move, the country's leading banks
have intensified efforts to strengthen their capital. One of the
most popular acts has been the issuing of bonds to raise money.

There has also been talk that Bank Indonesia might, in the
near future, increase the minimum CAR requirement to 12 percent.

As of last year, the CAR of local banks averaged around 23
percent, well above the 8 percent minimum required by the central
bank.