T

he Financial Services Authority (OJK) is preparing a regulation that will provide details of the necessary steps to be taken to salvage ailing banks and prevent the crisis from spreading further.

The regulation will be a follow-up of the financial system crisis prevention and mitigation bill (PPKSK) currently being deliberated at the House of Representatives.

An OJK commissioner Nelson Tampubolon said under the regulation the banks'€™ shareholders will be required to provide extra capital to support a '€œbail-in scheme'€ in times of crisis.

To ensure the shareholders have extra funds, Nelson said, the OJK would require conversion of certain assets in their banks into equities that could be injected into the banks'€™ core capital.

Currently, there is an OJK regulation that requires shareholders of troubled banks to convert their own assets in their banks, for instance, subordinated loans, into equities.

With the new regulation, he said, the agency would expand the requirement in which shareholders of troubled banks ensure that they could convert assets owned by third parties as well, such as bilateral loans and debt papers.

To ensure such a mechanism, the OJK will require any debt paper issuance by banks in the future to include an agreement clause in which investors buying the debt papers agree that shareholders of the banks could convert the assets into equities during times of crisis.

'€œAfter a bank converts all of its subordinated loans into equities and it still has issues in its capital, it will have to take the next step [of converting third party assets],'€ Nelson said in Jakarta recently.

He added that the upcoming regulation would list the type of debt papers allowed to be converted into equities. The rule would also include further steps that should be taken by bank owners if capital problems still exist, including through seeking new investors, he said.

Meanwhile, during the deliberation of the financial system crisis prevention and mitigation bill, the government and the legislators still differed on the funding options stipulated in chapters 49 and 50.

Chapter 49 stipulates that several funding options will be made available to assist the Deposit Insurance Corporation (LPS) in handling any collapsed banks. The funding options include the bank'€™s own capital through a bail-in scheme, Bank Indonesia'€™s assets, the LPS'€™ assets, banking industry contributions through premiums paid to the LPS and, finally, the state budget.

Those options are listed sequentially, meaning that the state budget is a last resort for use only when other options are insufficient to meet the LPS'€™ financing needs.

Nelson added that large lenders categorized as domestic systemically important banks (DSIB), popularly known as '€œtoo-big-to-fail banks'€, already had sufficient capital as required by the international Basel III regulation, with their capital adequacy ratio (CAR) hovering around 16 percent to 17 percent.

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.

'€” Tassia Sipahutar contributed to the story