04 Aug 2017
NEW LEGISLATION UPGRADES MEASURES TO PREVENT FINANCIAL CRISES AND IMPROVE FINANCIAL STABILITY
New regulations require Indonesia’s banking and finance industries to comply with heightened supervision by financial authorities. Foreign investors and customers concerned with Indonesian financial stability will welcome this new legislation. Key developments intensify reporting obligations for Systemically Important Banks, introduce tiered supervision, and raise safeguard measures.
The Indonesian government continues its efforts developed in response to Asian and Global Financial Crises of 1997 and 2008 to build and maintain a solid financial system. The enactment of Law No. 9 of 2016 regarding Prevention and Mitigation of Financial System Crises (“Law No. 9/2016”) provided a legal basis for the government to form the Financial System Stability Committee (Komite Stabilitas Sistem Keuangan or “KSSK”). KSSK members are the Ministry of Finance (“MoF”), Bank Indonesia (“BI”), the Financial Services Authority (Otoritas Jasa Keuangan or “OJK”), and the Deposit Insurance Corporation (Lembaga Penjamin Simpanan or “LPS”). The KSSK is tasked with coordinating with each other for the purpose of maintaining financial stability, managing financial crises and supervising Systemically Important Banks.
The OJK and the LPS have issued the following regulations so far this year in line with the requirements for Law No. 9/2016.
- No. 14/ POJK.03/2017 regarding Recovery Plans for Systemically Important Banks (“POJK No. 14/2017”);
- No. 15/ POJK.03/2017 regarding Determination of Status of and Follow-up Supervision of Commercial Banks (“POJK No. 15/2017”) ;
- No. 16/ POJK.03/2017 regarding Bridge Banks (“POJK No. 16/2017”).
- No. 1 of 2017 regarding Handling of Systemically Important Banks Which Are Experiencing Solvability Problem (“PLPS No. 1/2017”);
- No. 2 of 2017 regarding Settlement of Banks Other Than Systemically Important Banks Which Are Experiencing Solvability Problems (“PLPS No. 2/2017”);
- No. 3 of 2017 regarding Management, Administration, and Registration of Assets and Liabilities in the framework of a Banking Restructuring Program (“PLPS No. 3/2017”).
Below is an overview of the most important provisions of Law No. 9/2016 and the implementing regulations.
Recovery Plan for Systemically Important Banks
As a measure for the prevention of a financial crisis due to a Systemically Important Bank’s financial stress, the OJK via its regulation No. 14/2017 obliges Systemically Important Banks to prepare and submit a plan for the solution of their financial problems (“Recovery Plan”) to the OJK. This obligation applies to all banks which qualify as Systemically Important Banks. The Recovery Plan must at least contain:
- an executive summary of the plan;
- a general overview of the respective Systemically Important Bank;
- choices of the actions to take to remedy the financial stress (“Recovery Options”);
- disclosure of the Recovery Plan.
The Recovery Plan must be approved by the bank’s Board of Commissioners and General Meeting of Shareholders.
Law No. 9/2016 lists Recovery Options for the possible various issues faced by a Systemically Important Bank:
- A Systemically Important Bank having a capitalization issue can increase its capital by taking the following Recovery Options:
- Fund injection by its controlling shareholders or ultimate shareholders. This can be realized through capital payments, postponement of dividend payments, stock dividend distribution, and calculation of loss accumulation to become the burden of each shareholder in accordance with the shareholding portion.
- Conversion of loans from or investments of controlling shareholders or ultimate shareholders into the bank’s capital by converting them into ordinary shares.
- Right issues and/or private placements.
- Conversion of debts to third parties into ordinary shares or investment instruments.
- A Systemically Important Bank having a liquidity issue could i) arrange a line of credit line in the money market; or ii) apply for a sharia based short term loan or short term financing to Bank Indonesia;
- A Systemically Important Bank having a rentability issue could: i) increase its billing activities; or ii) introduce a cost efficiency program, and iii) sell its fixed assets;
- A Systemically Important Bank having an asset quality issue could i) do credit restructuring; or ii) remove its book of productive assets.
Supervision of Commercial Banks
POJK No. 15/2017 stipulates three levels of supervision to which banks may be subjected. The new provisions reflect the Indonesian government’s concern with maintaining the financial health of the country’s commercial banks with close monitoring and requirements to maintain a problem solution plan.
- Normal supervision - this is for banks not deemed as having potential difficulties or having difficulties which could affect their operational activities.
- Intensive supervision - this is for banks which do not meet the Minimum Capital Obligation (Kewajiban Penyediaan Modal Minimum) requirement, core capital ratio, non-performing loans ratio and minimum bank rating for soundness, and which are deemed as having difficulties which might potentially affect their operational activities.
- Special Supervision - this is for banks which are deemed as having difficulties that may harm their operational activities.
Banks other than Systemically Important Banks having significant issues, should:
- if under normal supervision, submit an action plan to the OJK;
- if under intensive supervision, conduct the following supervision actions: remove non-performing credit or financing after calculating their losses; limit payments of remuneration to the Board of Directors, the Board of Commissioners and other relevant parties; close their office network; submit an action plan to the OJK and reports of the plan’s realization other reports required by the OJK.
- if under special supervision, refrain from changing the composition of their shareholders and from selling any of their assets without the approval of the OJK. Upon the bank’s failure to improve its condition the OJK will pass on the bank’s solvability problem to the LPS.
PLPS No. 2/2017 provides four main steps for banks other than Systemically Important Banks which are having solvability problems:
1. Transfer part or all of the assets and/or liabilities to a Receiving Bank ;
2. Transfer part or all of the assets and/or liabilities to a Bridge Bank;
3. Receive temporary capital injection; and/or
4. Liquidate the bank.
Systemically Important Banks having significant issues should:
- if under normal supervision: i) implement their recovery plan and ii) submit an action plan to the OJK;
- if under intensive supervision: i) implement their recovery plan, ii) submit an action plan to the OJK, and iii) conduct the actions required by the OJK.
- if under special supervision, conduct the actions required by the OJK which will then pass on the bank’s solvability problem to the LPS. The LPS will conduct due diligence examination on the respective Bank and select a bank to act as the Receiving Bank for the assets and/or liabilities of the Bank or to inject capital to the Bank and become a new shareholder of the Bank.
PLPS No. 1/2017 provides three main steps for a Systemically Important Bank (“Bank”) which is having solvability problems:
- Transfer part or all of the assets and/or liabilities to a Receiving Bank;
- Transfer part or all of the assets and/or liabilities to a Bridge Bank;
- Inject new temporary capital into the Systemically Important Bank.
Both PLPS No. 1/2017 and PLPS No. 2/2017 vest authority in the LPS to, inter alia: i) take over and perform all of rights and obligations of the Bank’s shareholders; ii) manage the Bank’s assets and liabilities; iii) amend or revoke agreements with third parties which are deemed harmful to the Bank; iv) sell and/or transfer the Bank’s assets to the Bridge Bank or another Receiving Bank; v) temporarily inject new capital into the Bank; vi) conduct the Bank’s merger or consolidation.
Bridge Banks are established by the LPS, to receive the good quality assets and liabilities of a troubled bank and to take over the troubled bank’s operational activities before they are transferred to other parties.
Under POJK No. 16/2017, a Bridge Bank must have a principle license and a business license, for which the LPS is to submit an application to the OJK. After the Bridge Bank’s establishment, the LPS will arrange for the revocation of the troubled bank’s business license and liquidation.
The Bridge Bank is dissolved when the following have been completed:
a. Sale of the Bridge Bank’s shares to other parties;
b. Transfer of Bridge Bank’s assets and liabilities to other parties.
Bank Restructuring Program
Under PLPS No. 3/2017, the LPS must accept banks which are put by the KSSK under its care and handling through the Bank Restructuring Program. In this Bank Restructuring Program, the LPS can manage the assets of the banks under its care by way of: i) collection; ii) sale; iii) securitization; iv) litigation; v) set off; or vi) restructuring. The mechanism of each of the asset management ways is further detailed in this regulation. The program may be terminated by the Indonesian President at any time deemed appropriate by the President.
Effects on the affected parties
In general, Law No. 9/2016 is also an attempt to mitigate gaps among the financial regulators. From the viewpoints of the affected parties, we see the following benefits:
- The legislation could increase the customers’ trust in banks. Customers will come to see that banks have independent capability to prevent and manage their own financial issues and that the government will not need to bail them by using the State Budget;
- The legislation provides safeguards for Systemically Important Banks against financial crises as well as tools for the handling of financial troubles;
- The legislation provides Non-Systemically Important Banks with guidance on how they can maintain their good position as well as safeguards against potential issues which could cause them to become Systemically Important Banks or be put under intensive or special supervision.
In principle, the legislation enhances Indonesia’s regulatory support for a solid, stable and sustainable financial system. (by: Sarah Faisal Rosa)