Indonesia Imposes Extra Capital Requirements on Top Banks

(Bloomberg) -- Indonesia ordered the nation’s biggest lenders to set aside additional capital to bolster their ability to absorb losses and protect against any bank failures.

The Financial Services Authority, known as OJK, told the country’s systemically important banks to create a tier-1 capital surcharge of between 1 percent and 3.5 percent of risk-weighted assets, depending on the size and perceived riskiness of the lender, the regulator said in a statement on its website Tuesday. Banks have until Jan. 1 to meet the additional requirement, it said.

The move may conflict with government efforts to reverse a slowdown in lending and bolster the economy. Credit growth in Southeast Asia’s largest economy has fallen to single digits in the past two years from a more than 20 percent average in the decade before, as weak private investment weighs on demand for loans. President Joko Widodo early this month urged banks to take more risks as he seeks to accelerate economic growth before a re-election bid in 2019.

Indonesia Imposes Extra Capital Requirements on Top Banks

“While we can understand the intention of Indonesian regulators to safeguard the system, they should also consider the impact this stricter capital rule might have on the lenders’ ability to extend loans at a time when the country needs lots of financing for its infrastructure development,” said Taye Shim, head of research at Mirae Asset Sekuritas Indonesia.

OJK classified the country’s systemically important banks into five categories when deciding the size of the new capital surcharge. Together with Bank Indonesia, the regulator will revise the classification in March and September every year based on the lenders’ performance data, OJK said. The methodology used to identify systemically important banks will be revised at least once every three years, the authority added.

“Banks can meet the requirement through many ways, including raising fresh capital, but they must lay out the plan to us and get approval,” Heru Kristiyana, banking commissioner at OJK, said by phone. “It’s not a burden because in other countries, systemic banks are required to have buffer as well for prudence. This is an international practice.”

©2018 Bloomberg L.P.