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31 January 2014
The Indonesian central bank, Bank Indonesia, recently issued two regulations that will change the way in which banks in the country do business. The regulations govern the business activities of banks on the basis of their capital. As a result, commercial banks which in the past had more freedom in their operations thanks to the Banking Law (7/1992, as amended) are now limited to undertaking business transactions that are in line with their capital strength.
The two new regulations are the Regulation on Banks' Business Activities and Core Capital-Based Office Networks (14/26/PBI/2012) and the Regulation on the Minimum Capital Adequacy Requirement for Commercial Banks (14/18/PBI/2012). It is clear that with Regulations 14/26 and 14/18, Bank Indonesia wishes to ensure that, on the one hand, banks run their businesses in accordance with their capital strength and, on the other, that these banks increase their capital up to an international level while being more resilient to the risks faced following changes to the global financial system.
Regulation 14/18 follows the international practice of linking a bank's capital to its risk profile. It requires a bank's capital to be in line with its risk profile. The minimum capital requirements for local banks are calculated by using the minimum capital adequacy requirement ratio. Regulation 14/18 stipulates the following minimum capital requirements for the various risk profiles:
For banks with subsidiary companies, these minimum capital adequacy requirements apply to the banks individually as well as in consolidation with their subsidiaries. To ensure compliance with the requirement, Regulation 14/18 prohibits banks from distributing profits if the profit distribution causes the bank to fall short of its capital requirement.
Regulation 14/18 further regulates banks' capital based on their residency status or place of establishment. For banks with a head office in Indonesia, capital consists of:
The structure of a local bank's core capital is determined by taking into consideration the following deduction factors:
These factors can trigger a deduction of up to 50% of both core capital and supplementary capital. Capital deduction factors do not apply to risk-weighted assets for credit risk.
Supplementary capital (Tier 2) that consists of upper and lower-level supplementary capital can account for no more than 100% of core capital, while exclusively lower-level supplementary capital can account for no more than 50% of core capital.
Upper-level supplementary capital (upper Tier 2) consists of:
Lower-level supplementary capital (lower Tier 2) consists of, among other things, preferred shares that can be withdrawn after a certain period of time (redeemable preferred shares) and/or subordinated loans or subordinated obligations.
Additional supplementary capital
Additional supplementary capital (Tier 3) must meet the following conditions:
Tier 3 capital includes:
Supplementary capital (upper and lower Tier 2, as well as Tier 3) in the form of capital instruments must meet the following requirements:
Supplementary capital of upper Tier 2, lower Tier 2 and Tier 3 which bears 'call option' features must meet certain conditions imposed by Regulation 14/18 before the call options can be exercised.
Unlike banks with headquarters in Indonesia, branches of foreign banks operating in Indonesia (presently limited to 10 foreign banks) are subject to the capital equivalency maintained assets (CEMA) requirement. Regulation 14/18 stipulates that the capital of these branch offices can consist of:
Banks must determine the financial assets for inclusion in the CEMA to meet the minimum CEMA requirement. Once made, the determination cannot be changed until the next period of CEMA fulfilment. The following assets may be included and calculated as CEMA:
To improve the resiliency, competitiveness and efficiency of Indonesian banks, the central bank has imposed rules on banks' eligibility to enter into different types of business transactions on the basis of the banks' capital strength. As a result, in the future banks in Indonesia will be assigned to one of four categories – or 'BUKUs' as they are referred to in Regulation 14/26 – in accordance with their core capitalisation, with BUKU 1 being the lowest rank and BUKU 4 the highest. Regulation 14/26 will become effective for most banks in 2016, with the exception of regional/provincial government-owned banks, which will become subject to it in 2018.
Regulation 14/26 stipulates the following core capital amounts for the four BUKUs:
This categorisation system will affect banks not only in terms of how they conduct their businesses and serve their customers (eg, BUKU 1 banks will not have the same ability to enter into business transactions as BUKU 4 banks), but also in terms of their ability to enter into capital investment/participation and to channel loans (eg, BUKU 1 banks cannot channel as many loans as BUKU 4 banks). Regarding capital investment, Regulation 14/26 stipulates the following maximum limits:
Regulation 14/26 also stipulates banks' obligation to channel loans or financing facilities to productive businesses in line with their BUKU categories, as follows:
A bank's BUKU category will also determine its branching ability. The opening of an office network overseas, for instance, may be undertaken only by BUKU 3 and BUKU 4 banks, with certain restrictions for BUKU 3 banks. BUKU 3 banks may open office networks only in Asia, while BUKU 4 banks may open office networks worldwide.
For further information on this topic please contact Hamud Balfas at Ali Budiardjo, Nugroho, Reksodiputro by telephone (+62 21 250 5125), fax (+62 21 250 5121) or email (firstname.lastname@example.org). The Ali Budiardjo, Nugroho, Reksodiputro website can be accessed at www.abnrlaw.com.
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