Bank Indonesia tells banks to create buffers for bad times

  • Banking
  • Thursday, 31 Dec 2015

JAKARTA: Indonesia's central bank issued a new regulation requiring banks to increase their capital during economic boom periods to protect against possible future losses coming from excessive loan growth.

In a statement issued on Thursday, Bank Indonesia said it will set the adjustable countercyclical capital buffers requirement within a zero-to-2.5% range of risk-weighted assets, which would be additional to banks' existing capital adequacy ratio (CAR) requirements.

The central bank will evaluate the required capital buffer levels at least every six months and make adjustments based on prevailing economic conditions. The new buffer requirement will be set at zero as of Jan 1.

Bank Indonesia said banks tend to lend more during periods of strong economic growth, which may lead to an increase in systemic risks and that countercyclical buffers would help to mitigate these risks.

Banks will be given 6 to 12 months to raise their capital buffers when Bank Indonesia increases the requirements, however, cuts in capital requirements will apply immediately.

Sigit Pramono, chairman of Indonesia's banks association, told Reuters banks have already prepared for such rules as they were stipulated in Basel III, a global, voluntary regulatory framework on banks' capital adequacy norms.

"Big banks have anticipated this - so if it is applied starting next year, banks are ready and we have no problem," he said.

Indonesian banks have sound capital with average CAR in October reaching 20.8%. Yearly loan growth in October was 10.4%, which was relatively slow compared with more than 20% during the commodity boom years.

The slow credit growth reflects weak economic growth with this year set to be the slowest since 2009.

Banks' profits have been under pressure this year as they sharply hiked bad-loan provisions and non-performing loans grew. - Reuters
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