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.
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:
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:
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.
Banks other than Systemically Important Banks having significant issues, should:
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:
PLPS No. 1/2017 provides three main steps for a Systemically Important Bank (“Bank”) which is having solvability problems:
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:
In principle, the legislation enhances Indonesia’s regulatory support for a solid, stable and sustainable financial system. (by: Sarah Faisal Rosa)