Djono Subagjo, an Indonesian who heads Financial Risk Modelling and Assessment department at a bank in the Netherlands, discusses what Basel III would mean for his native country’s lenders.
April 26, 2011 | Djono SubagjoThe implications of Basel III will be felt sooner than later, as pressure and expectations from the market, general public and regulators grow much earlier than the implementation phase-in date of 2015. In the Netherlands, where I am currently based, the central bank requires banks to prepare a migration plan to Basel III subject to periodical reporting for monitoring purposes in 2011. However, things are obviously a lot different in Indonesia and given below, I have tried to present some insights about Indonesian lenders in light of the new rules on capital and liquidity:
Capital adequacy standards
From a sample of the 2010 bank annual reports listed on the Jakarta Stock Exchange, it is clear that Indonesian banks are well capitalised according to Basel III norms in terms of size and quality of equity base.
Indonesia's banks are, however, still required to calculate and report capital adequacy ratios (CAR) according to the Basel II framework. In February 2011, Bank Indonesia issued the final rule on the Standardised Approach under Basel II for credit risk which will come into force on January 1st 2012.
Furthermore, it is less clear how adequate the capital base would be if all the risks are captured based on Pillar 1 calculations and Pillar 2 processes following the revised Basel II guidelines. On the back of currently high credit growth, capital adequacy can become an issue if incentives are not given to banks to retain more earnings in the book, which brings us to the next essential insight on the new capital adequacy framework.
Capital conservation buffers
Basel III contains proposals for a capital conservation buffer and a counter-cyclical buffer that builds up of buffers in good times that can be drawn upon in periods of stress. Under the capital conservation buffer, when a bank’s capital levels moves close to stipu...
Categories:
Risk And Regulation Working GroupKeywords:
