BI mulls raising CAR requirement
The Jakarta Post
Bank Indonesia (BI) is mulling whether to increase the minimum capital requirements for lenders to prevent the banking industry from suffering major blows during economic crises, a top official says.
BI Deputy Governor Halim Alamsyah said the central bank was now in talks with representatives from the banking industry about the idea. 'We are discussing whether or not the time is right to do so,' he said on Thursday.
With a higher requirement level, lenders will be expected to have sufficient capital that can cushion negative impact during troubled times; a timely suggestion considering the economic turmoil in the third quarter ( Q3 ).
However, no specific form of requirement has been agreed upon, Halim said.
One of the steps proposed to avert financial collapse would be to implement new banking rules, known as the Basel III Accord.
As previously reported, the central bank said Basel III would help ensure micro-prudence and stricter discipline among banks. The implementation is slated to be carried out in several stages this year and be fully implemented by 2019.
One of the key points under the new rules is the establishment of 10.5 percent capital adequacy ratio (CAR), higher than the current 8 percent CAR as regulated by the previous Basel II Accord.
CAR is the ratio of a bank's primary capital to its assets and is used to measure a bank's financial strength and stability.
The new ratio will include a 2.5 percent conservation buffer and an increase in banks' Tier 1 capital, which will be set at 6 percent from the current 4 percent. Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view and it consists of restrained earnings and equity.
According to the latest banking statistics issued by BI, the average CAR among commercial banks ' comprising 120 banks ' already exceeds that required by either the Basel II or Basel III accords. CAR stood at 18.1 percent as of July 2013, up from 17.3 percent recorded a year earlier, while Tier 1 capital reached 16.3 percent.
State-owned banks had an average CAR of 16.4 percent, while that of joint venture banks was reportedly 20.3 percent.
Meanwhile, foreign and regional development banks (BPDs) had an average CAR of 32.7 percent and 16.7 percent, respectively.
Despite the current 'seemingly sound' ratios, Halim said the central bank would continue to monitor banks' CAR levels to detect any possibility of financial failure.
Contacted separately, several bank executives expressed their optimism over BI's plan to raise the capital requirement. Jahja Setiaatmadja, Bank Central Asia's (BCA) president director, said that its CAR totaled 16 percent. 'The figure is sufficient,' he said in a text message.
Bank Mandiri president director Budi Gunadi Sadikin said the plan would be positive for the industry as it would trigger banking consolidation among small and medium lenders. The bank's CAR currently stands at 15.6 percent.
Meanwhile, Bank Negara Indonesia (BNI) economist Ryan Kiryanto said banks would be forced to immediately recalculate their capital adequacy as a consequence of BI's plan.
'Shareholders may be required to inject fresh funds or the banks may be obliged to set aside part of their profits as additional capital. They may also ask strategic investors to join or issue debt papers,' he said.
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