New regulations to prevent financial crises and improve financial stability

Introduction

New regulations require the banking and finance industries to comply with heightened supervision by financial authorities and will be welcomed by foreign investors and customers concerned with Indonesia's financial stability. Key developments include intensifying reporting obligations for systemically important banks, introducing tiered supervision and raising safeguard measures.

The government continues its efforts, developed in response to the Asian and global financial crises of 1997 and 2008, to build and maintain a solid financial system. The enactment of Law 9/2016 regarding the prevention and mitigation of financial system crises provided a legal basis for the government to form the Financial System Stability Committee (KSSK). The KSSK comprises the Ministry of Finance, Bank Indonesia, the Financial Services Authority (OJK) and the Deposit Insurance Corporation (LPS). KSSK members cooperate in order to maintain financial stability, manage financial crises and supervise systemically important banks.

So far in 2017 the OJK and the LPS have issued regulations in line with the requirements for Law 9/2016.

The OJK regulations deal with:

• recovery plans for systemically important banks (POJK 14/2017);
• the determination of status and follow-up supervision of commercial banks (POJK 15/2017); and
• bridge banks (POJK 16/2017).

Further, the LPS regulations deal with the:

• handling of systemically important banks experiencing solvability problems (PLPS 1/2017);
• settlement of banks other than systemically important banks which are experiencing solvability problems (PLPS 2/2017); and
• management, administration and registration of assets and liabilities in the framework of a banking restructuring programme (PLPS 3/2017).

This update outlines the key provisions of Law 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 Regulation 14/2017) obliges systemically important banks to prepare and submit a plan for the solution of their financial problems to the OJK. This obligation applies to all banks which qualify as systemically important banks. The recovery plan must contain at least:

• an executive summary of the plan;
• a general overview of the respective systemically important bank;
• options to take to remedy the financial stress (recovery options); and
• the recovery plan.

The recovery plan must be approved by the bank's board of commissioners and general meeting of shareholders.

Law 9/2016 lists recovery options for the following issues faced by a systemically important bank:

• A capitalisation issue – the bank can increase its capital by taking the following recovery options:
  • fund injection by its controlling shareholders or ultimate shareholders through capital payments, postponing dividend payments, stock dividend distribution and the 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 private placements; or
  • converting third-party debts into ordinary shares or investment instruments.
• A liquidity issue – the bank could:
  • arrange a line of credit in the money market; or
  • apply for a sharia-based short-term loan or short-term financing to Bank Indonesia.
• A rentability issue – the bank could:
  • increase its billing activities; or
  • introduce a cost efficiency programme and sell its fixed assets.
• An asset quality issue – the bank could:
  • conduct credit restructuring; or
  • remove its book of productive assets.

Supervision of commercial banks

POJK 15/2017 stipulates three levels of supervision to which banks may be subjected. The new provisions reflect the 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 – for banks not deemed to have potential difficulties or difficulties which could affect their operational activities.
• Intensive supervision – 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 to have difficulties which might affect their operational activities.
• Special supervision – for banks which are deemed to have difficulties that may harm their operational activities.

A non-systemically important bank with significant issues should:

• if under normal supervision, submit an action plan to the OJK;
• if under intensive supervision:
  • remove non-performing credit or financing after calculating its losses;
  • limit payments of remuneration to its board of directors, board of commissioners and other relevant parties;
  • close its office network; and
  • submit an action plan, reports of the plan's realisation and any other required reports to the OJK; and
• if under special supervision, refrain from changing the composition of its shareholders and from selling any of its assets without the approval of the OJK. If the bank fails to improve its condition the OJK will pass on the bank's solvability problem to the LPS.

PLPS 2/2017 provides steps for non-systemically important banks which are having solvability problems to:

• transfer part or all of the assets or liabilities to a receiving bank;
• transfer part or all of the assets or liabilities to a bridge bank;
• receive temporary capital injection; and
• liquidate the bank.

Systemically important banks with significant issues should:

• if under normal supervision, implement the recovery plan and submit an action plan to the OJK;
• if under intensive supervision, implement the recovery plan, submit an action plan to the OJK and conduct the actions required by the OJK; or
• 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 a 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.

PLPS 1/2017 provides three main steps for a systemically important bank which is having solvability problems:

• transfer part or all of the assets or liabilities to a receiving bank;
• transfer part or all of the assets or liabilities to a bridge bank; and
• inject new temporary capital into the systemically important bank.

Both PLPS 1/2017 and PLPS 2/2017 vest authority in the LPS to, among other things:

• take over and perform all of the rights and obligations of the bank's shareholders;
• manage the bank's assets and liabilities;
• amend or revoke agreements with third parties which are deemed harmful to the bank;
• sell or transfer the bank's assets to the bridge bank or another receiving bank;
• temporarily inject new capital into the bank; and
• conduct the bank's merger or consolidation.

Bridge banks

Bridge banks were established by the LPS to receive the good quality assets and liabilities of a troubled bank and take over the troubled bank's operational activities before they are transferred to other parties.

Under POJK 16/2017 a bridge bank must have a principal licence and a business licence, 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 licence and liquidation.

The bridge bank is dissolved when the sale of the bridge bank's shares to other parties and transfer of its assets and liabilities to other parties have been completed.

Bank restructuring programme

Under PLPS 3/2017 the LPS must accept banks which the KSSK puts under its care and handling through the bank restructuring programme. In this programme the LPS can manage the assets of the banks under its care by way of:

• collection;
• sale;
• securitisation;
• litigation;
• set-off; or
• restructuring.

The mechanism of each of these is expanded on within the regulation. The programme may be terminated by the president at any time.

Effects

Generally, Law 9/2016 is also an attempt to mitigate gaps among the financial regulators. From the view of the affected parties, 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 need not bail them out by using the state budget;
• provides safeguards for systemically important banks against financial crises, as well as tools for the handling of financial troubles; and
• provides non-systemically important banks with guidance on how to maintain a 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.