I

ndonesian banks will be among those in Asia entering phase three of global banking reform more easily due to inherent conservatism since the 1998 Asian crisis, says the central bank.

The banking and monetary authority says stricter discipline under the third phase, which will gradually require banks to hold greater capital buffers, is already well in place given Indonesia’s banking industry.

Previously on Monday, global regulators agreed on new banking rules aimed at averting another financial collapse. The agreement, known as the Basel III accord, is designed to reshape the credit industry by imposing stricter discipline on credit cards, mortgages and other loans in a bid to prevent another financial meltdown as was triggered by the US sub-prime mortgage crisis.

Currently banks must hold back at least 4 percent of their balance sheet to cover their risks. The mandatory reserve — known as Tier 1 capital — will rise to 4.5 percent by 2013 under the new rules and reach 6 percent by 2019.

Tier 1 capital is the core measure of a bank’s financial strength from a regulator’s point of view, consisting of retained earnings and equity (core capital).

BI deputy governor Halim Alamsyah said Indonesian banking Tier 1 ratio condition was way higher than 4.5 percent, citing a range of between 14 and 16 percent for Indonesian banks’ average Tier 1 reserves.

“Capitalization in Indonesian banks is very solid. On average, small banks’ Tier 1 ratios are, in fact, higher [than 16 percent]. Some major banks, with Tier 1 ratio above 14 percent, are still planning on a rights issue, which will add to their capitalization,” Halim added.

Two of the top five largest banks in Indonesia, state-owned Bank Mandiri and BNI, will launch rights issues to raise Rp 14 trillion and Rp 10 trillion respectively between November and December.

In addition, banks would be required to keep an emergency reserve known as a “conservation buffer” of 2.5 percent. In total, the amount of reserves each bank is expected to hold by the end of the decade will be 8.5 percent of its balance sheet.

Banks will face curbs on bonuses and will not be able to pay out dividends if they do not comply with these new rules.

Muliaman Hadad, a deputy governor at the country’s central bank (BI) said that unlike other banks in more developed markets, existing financial instruments here were less sophisticated, and thus less susceptible to market shocks.

“As we are trying to develop our instruments, banks in other countries are going back to basics,”
he said.

Purbaya Yudhi Sadewa, Danareka Research Institute’s head of research, said Indonesia’s banking sector condition was one of the country’s lead sectors in navigating the global financial crisis. Thus, he said, Indonesian banks would meet the new Basel III requirements.

“There are several rules under Basel III. [Indonesian banks] are strong in terms of capitalization, so they should be okay. Normally, if Tier 1 capital ratio and capital adequacy ratios (CARs) are sufficient, other key ratios will be fine,” Purbaya told The Jakarta Post.

BI latest data showed that in the first half of this year, only 8 banks, out of the total of 113 in the country, had a capital adequacy ratio (CAR) of below 8 percent.

Recently, the country’s central bank announced that the average Indonesian banks’ CAR stood at 16.6 percent up to August of this year.