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Basel Committee flags shortcomings in Indonesian capital rules

A global banking regulator has said regulatory frameworks in Indonesia, Japan and Switzerland are all compliant with rules governing bank liquidity, while Indonesia is "largely compliant" with standards on bank capitalization.

The Bank for International Settlements on Dec. 9 said the publication of the reports on the implementation of Basel Committee on Banking Supervision risk-based capital standards in Indonesia completed its review of implementation in all member countries. It also published its first follow-up assessment, deeming Japan compliant with the risk-based capital rules.

Indonesia's "largely compliant" status is one notch below the highest grade and reflects progress made between July and September at the urging of the assessment team, without which the assessment "would have generated a less positive result." Components of Indonesia's regulatory framework to do with the definition of capital, securitization, market risk and capital buffers were deemed largely compliant, while the credit risk component was deemed "materially noncompliant."

That reflected two material differences between the Basel framework and the Indonesian rules. One difference is that Indonesia allows claims against the government and central bank to be assigned a zero risk weight for capital purposes even if those claims are denominated in foreign currency, whereas the Basel rules permit zero risk weights for domestic-denominated and funded exposures.

Additionally, loans to employees and pensioners of certain state-owned enterprises receive a 50% risk weight, compared to the 75% under the Basel framework.

"Both differences overstate the capital ratios of Indonesian banks compared to the ratio that would apply under the Basel rules, materially so for some banks," the committee said.

Indonesian authorities said in response that they "do not fully agree with and choose not to make adjustments" on either measure. They said the lower risk weighting of loans to employees and pensioners of state-owned enterprises is appropriate given that those loans "meet requirements that are much stricter than those of retail loans," and they said the decision to assign zero risk weights to foreign-currency government exposures was made based on "national economic interest as well as prudential considerations."