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.