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BI'€™s new capital buffer ruling '€˜positive for banks'€™

The central bank’s new regulation that requires banks to set aside an additional capital buffer on top of existing capital requirements is regarded as positive for the local banking sector as it could mitigate losses from rapid loan growth, an international rating agency has said

Grace D. Amianti (The Jakarta Post)
Jakarta
Wed, January 13, 2016

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BI'€™s new capital buffer ruling '€˜positive for banks'€™

T

he central bank'€™s new regulation that requires banks to set aside an additional capital buffer on top of existing capital requirements is regarded as positive for the local banking sector as it could mitigate losses from rapid loan growth, an international rating agency has said.

Bank Indonesia (BI) issued the regulation on Dec. 28, requiring banks to prepare a '€œcountercyclical buffer'€ of between zero to 2.5 percent of their risk-weighted assets. The exact rate will be determined at least once every six months.

'€œThe introduction of a countercyclical buffer is credit positive for Indonesian banks because it will add an additional layer of loss-absorbing capital during periods of rapid credit growth,'€ said Simon Chen, vice president and senior analyst of Moody'€™s Singapore.

The initial countercyclical buffer requirement was set at zero percent, the low end of the range BI established.

At present Indonesian banks are required to have a capital adequacy ratio (CAR) of 8 percent in compliance with the Basel III global regulatory framework on capital adequacy. Local banks'€™ overall CAR stood at 21.35 percent as of November 2015, well above the healthy level.

Other requirements of additional capital are stipulated in CAR regulations, which require a '€œcapital conservation buffer'€ to anticipate losses in a crisis period as well as a special '€œcapital surcharge'€ required for too-big-too-fail banks, formally known as domestic systemically important banks (DSIB).

'€œThe countercyclical buffer policy is implemented in an economic boom period so as to anticipate losses caused by excessive loan growth, along with other additional capital required for banks,'€ BI said in a statement.

Moody'€™s Chen and associate analyst Komaresan Subramanian said in the report that Indonesia'€™s current sluggish economic and credit growth had led BI to set the initial buffer at zero percent.

'€œThe availability of this buffer provides BI with a tool it can use to compel banks to conserve capital and slow their balance sheet growth during the next credit upswing,'€ they said in a statement.

In addition to the countercyclical buffer, the capital conservation buffer and DSIB capital surcharge are already in effect, of which Chen and Subramanian said '€œthe development completed the incorporation of all key aspects of the Basel III capital regime into the Indonesian capital framework.'€

The regulation requiring a capital surcharge for DSIB banks was issued on Dec. 31, by the Financial Services Authority (OJK) as part of the Basel III requirement.

Indonesia'€™s DSIB banks are required to raise their minimum common equity Tier 1 ratio to 12 percent by January 2019, from 5.75 percent currently, assuming the full incorporation of capital conservation, countercyclical and DSIB capital surcharges.

The DSIB is a term used to describe banks that are so important that their insolvency could impact the whole economy. These banks typically have broad business networks and operate subsidiaries in various financial sectors.

According to Moody'€™s assessment, rated Indonesian banks are mostly well capitalized and are expected to meet the increased capital requirements without needing to raise additional capital.

The full adoption of the Basel III rules is expected by 2019, according to a timeframe set by the Basel Committee on Banking Supervision '€” an international association of banking supervisory authorities.

The minimum total capital set in the Basel III framework was set at 8 percent, but starting from 2016, banks have to meet an additional capital buffer of 0.625 percent, raising the minimum total capital to 8.625 percent. The benchmark is set to increase each year to reach 10.5 percent by 2019, when the Basel III requirements are set to be fully implemented.

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