On 28 December 2015, the Indonesian Financial Services Authority ("OJK") issued a new regulation No.46/POJK.03/2015 ("POJK 46") regarding Determination of Systemically Important Banks and Capital Surcharge.
POJK 46 was issued in accordance with the implementation of Basel III which imposes a Capital Surcharge for banks categorized as "Systemically Important Banks" ("SIB") starting from 1 January 2016.
The determination of SIB is aimed to identify banks whose business failures might significantly impact the domestic financial system. Certain methodology is used in assessing a bank's systemic level which reflects the potential adverse effect when these "too big to fail" banks fail. Capital Surcharge for SIB is expected to reduce negative effects to the financial system and to economic stability because the banks would be imbued with a higher capability of absorbing losses if one of them fails.
Under POJK 46, the OJK, in coordination with Bank Indonesia, will determine which banks are categorized as SIBs and the amounts of Capital Surcharge they have to form, and the OJK will notify the identified banks in writing.
For the first time, the determination of the SIB and the Capital Surcharge will be conducted in January 2016 based on financial data as of June 2015.
This note is intended to give an overview only on the key highlights in POJK 46, as described below:
1. The Indicators of SIB
The OJK will identify which banks are categorized as SIBs based on the bank's size, interconnectedness with the financial system, and complexity of its business activity.
- "size" is measured by the total exposures in balance sheet, administrative account, and potential future exposure from derivative transactions;
- "interconnectedness" is measured by the intra financial system's assets, liabilities, and securities outstanding; and
- "complexity" is measured by the spot notional and over-the-counter (OTC) derivative value, available and salable securities not categorized as high quality liquid assets in the calculation of liquidity coverage ratio, domestic indicators determined by OJK, and substitutability of the bank's role in payment system and custodian.
2. Capital Surcharge for SIB
The OJK sets the Capital Surcharge for SIB in 5 (five) Buckets every six months which must be fulfilled by using the component of Common Equity Tier 1. The following are the amounts of capital surcharge for each category of SIB:
- Capital Surcharge of SIB in Bucket 1
is 1% of the risk-weighted asset that must be fulfilled gradually
- 0.25 % as of 1 January 2016
- 0.5 % as of 1 January 2017
- 0.75 % as of 1 January 2018
- 1 % as of 1 January 2019
- Capital surcharge of SIB in Bucket 2
is 1,5 % of the risk-weighted asset that must be fulfilled
- 0.375 % as of 1 January 2016
- 0.75 % as of 1 January 2017
- 1.125 % as of 1 January 2018
- 1.5 % as of 1 January 2019
- Capital surcharge of SIB in Bucket 3
is 2 % of the risk-weighted asset that must be fulfilled gradually
- 0.5 % as of 1 January 2016
- 1 % as of 1 January 2017
- 1.5 % as of 1 January 2018
- 2 % as of 1 January 2019
- Capital surcharge of SIB in Bucket 4
is 2,5 % of the risk-weighted asset that must be fulfilled
- 0.625 % as of 1 January 2016
- 1.25 % as of 1 January 2017
- 1.875 % as of 1 January 2018
- 2.5 % as of 1 January 2019
- Capital surcharge of SIB in Bucket 5 is 3,5 % of the risk-weighted asset;
POJK 46 states, however, that for the first determination of SIBs, the OJK will only categorize SIBs into Buckets 1, 2, 3, and 4.
3. How Does it Affect You?
POJK 46 imposes Capital Surcharge for banks categorized as SIBs only, and these banks may likely be those that have broad business network and operate numerous subsidiaries in various financial sectors. These banks may expect to be required to form Capital Surcharge ranging from 0.25% to 0.625% of the risk-weighted assets starting from 1 January 2016 depending on which buckets they are categorized.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.