Indonesia clears path for Basel II reforms

Apr 21 2008 Trond Vagen in Hong Kong

Bank Indonesia, the country's central bank and prudential regulator, has overhauled its banking regulations — partly to prepare for the implementation of Basel II early next year.

The bank said the objective behind the reforms, which came in the form of a package of new policies, was to repair and strengthen the institutional structure of banks and to improve risk management through the implementation of the Basel II accord.

"It is expected that this package of banking regulations will catalyse economic growth and concomitantly maintain financial system stability amid sluggish global economic performance that remains unpropitious at present", said Muliaman D Hadad, deputy governor of Bank Indonesia.

The regulation package consists of:

  • regulations lowering the risk weighting to calculate the risk-weighted assets of small business loans guaranteed by insurance corporations fulfilling certain criteria
  • regulations reducing the risk weighting to calculate the risk-weighted assets of corporate bonds
  • regulations raising the legal lending limit for groups of non-bank-related debtors
  • regulations regarding the establishment of commercial banks and other institutions
  • regulations concerning the execution of Basel II implementation
  • regulations on ratings and ratings agencies recognised by Bank Indonesia

    • Basel II is set to be introduced in Indonesia on January 1, 2009, for banks with assets of more than 1trn rupiah ($110m). For other banks, the implementation date will be in June 2009, covering the standard approach for credit risk, the standard and internal model approaches for market risk, and base indicator approach for operational risk. Implementation of pillar two (supervisory review process) and pillar three (market discipline) will be carried out gradually.

    The bank noted that the current mechanism to calculate capital adopts a "one-size-fits-all" approach that neither offers any incentives for banks with good risk management nor reflects the risk level faced by banks. It said the Basel II framework would improve risk management quality in banks and the quality of supervision conducted by the relevant supervisory authority, eventually contributing to financial system stability.

    In 2004, Bank Indonesia surveyed all banks to gauge their perception of the Basel II framework and assess the level of preparedness should it be implemented in Indonesia. The survey results demonstrated that the majority of banks understood the benefits of Basel II implementation but stipulated that implementation should begin using the simplest approach. The bank subsequently compiled a roadmap that will see all of the Basel II pillars implemented in Indonesia by 2011