On 28 December 2015, Bank Indonesia issued a new regulation No.17/22/PBI/2015 ("PBI 17") concerning Mandatory Formation of Countercyclical Buffer.
PBI 17 was issued in accordance with the implementation of Basel III which requires Banks to increase their capital during economic boom periods to protect against possible future losses coming from excessive loan growth.
A Countercyclical Buffer is a macro-prudential policy instrument designed to set aside an additional capital buffer on top of the existing capital requirements in order to protect banks from excessive risk-taking behavior in the form of excessive lending during an economic boom which could exacerbates the systemic risk.
The requirements relating to the Countercyclical Buffers shall be applied to all Indonesian Commercial and Sharia Banks including branch offices of foreign banks in Indonesia starting from 1 January 2016.
This note is intended to give an overview only on the key highlights in PBI 17, as described below:
1. The Level of Countercyclical Buffer
Bank Indonesia requires banks to form a Countercyclical Buffer ranging from 0% to 2.5% of their risk-weighted assets which would be additional to banks' existing capital adequacy ratio requirements. Bank Indonesia may determine a different range of the Countercyclical Buffer in accordance with the development of macro economy, the financial system in Indonesia, and/or global economic conditions.
For the first time, the new Countercyclical Buffer level is set at 0% which is effective starting from 1 January 2016.
For Indonesian commercial banks, the Countercyclical Buffer must be fulfilled by using the component of Common Equity Tier 1 (Modal Inti Utama); while for a branch office of a foreign bank, it must be fulfilled by using the component of the bank's Capital Conservation Buffer.
2. The Countercyclical Buffer Evaluation
Bank Indonesia will evaluate the required Countercyclical Buffer levels at least every six months and make adjustments based on prevailing economic conditions.
The result of the evaluation will determine: (1) the fixed, applicable levels of the Countercyclical Buffer; or (2) the need to adjust the levels of the Countercyclical Buffer. Any adjustments of the Countercyclical Buffer levels will be set out by virtue of a BI Circular Letter.
To give the banks time to adjust to a new buffer level, Bank Indonesia will pre-announce its decision to raise the level of the Countercyclical Buffer, which will take effect for, at least, 6 (six) months but no later than 12 (twelve) months after the enactment. Decisions by Bank Indonesia to decrease the level of the Countercyclical Buffer will take effect immediately.
3. Supervision and Sanctions
Bank Indonesia and the Financial Services Authority ("OJK") will cooperate in supervising the mandatory formation of a Countercyclical Buffer. Banks which violate the provisions stipulated in Articles 2, 5, and 6 of PBI 17 will be sanctioned by OJK according to the provisions governing capital adequacy of banks.
4. How Does it Affect You?
While the level Countercyclical Buffer for the first time is set at 0% starting from 1 January 2016, Banks should anticipate that a new level of Countercyclical Buffer may be set by Bank Indonesia in the near future and so to prepare to form a Countercyclical Buffer.
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.