## 1idnea2024004-print-pdf ## Source details **Canonical URL:** [1idnea2024004-print-pdf](https://www.imf.org/-/media/files/publications/cr/2024/english/1idnea2024004-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1idnea2024004-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1idnea2024004-print-pdf.pdf.json) --- ### Executive summary — key progress and institutional developments - OJK has implemented the Basel III post-crisis reforms and deployed Supervisory Technologies (SupTech). - The Financial Sector Omnibus Law (FSOL) strengthens OJK’s institutional set-up, powers (e.g., banks’ recovery, mergers and acquisitions, investigation), and clarifies KSSK’s mandate. - New regulations on corporate governance elevate governance importance in the banking industry. - Assessment performed using BCBS BCP methodology (2012 revision); Indonesia chose to be assessed against Essential Criteria (EC) only. Assessment mission dates: September 20 to October 10, 2023. ### Supervisory approach, capacity, and methodology - Current strengths: - Risk methodology structured around RBBR with four components: (i) risk profile; (ii) corporate governance; (iii) earnings; (iv) capital. - Six-point supervisory cycle beginning with “know your bank”; semi-annual risk assessments and annual on-site examinations. - Comprehensive data collection with daily, weekly, monthly, quarterly, semi-annual, and annual reporting supported by SupTech (SIP, OSIDA, APOLO). - Identified limitations: - RBBR concentration: 105 banks’ ratings concentrated in middle 2 of 5 ratings — indicates insufficient granularity/discrimination. - Risk rating methodology needs to be more risk sensitive and evidence-based. - On-site examinations of corporate governance and risk management effectiveness are limited. - Capacity-building recommendations: - Invest in training and upskilling, especially accounting, corporate governance, credit risk, operational risk (non-IT), and model validation specialists. - Take a holistic, portfolio-level view of risks and better integrate ICAAP, stress testing, D-SIBs, and recovery plans into SREP and supervisory framework. - Consider moving from semi-annual to annual rating assessments to rebalance supervisory resources. ### Legal framework, objectives, and independence - Legal scope and powers: - OJK established under Law Number 21 of 2011 as lastly amended by Law Number 4 of 2023 (FSOL). - Powers include issuing legally binding regulations, collecting information from regulated institutions and their parents/subsidiaries, and imposing corrective actions and sanctions. - Objectives and primary mandate: - Primary legislation gives broad objectives including financial stability, financial sector development, credit growth, and consumer protection. - Recommendation: Legislation should explicitly recognize safety and soundness of banks and the banking sector as OJK’s primary responsibility. - Independence concerns: - Ex-officio BoC member (typically Vice Minister of Finance) could lead to political interference/conflicts, especially for state-owned banks. - FSOL 2023 incorporates OJK budget into State budget; legal protections for supervisors exist but do not explicitly guarantee coverage of legal defence costs. - Recommendation: strengthen independence safeguards, clarify Supervisory Board composition, and operationalize legal protection including defence-cost coverage. ### Banking system structure and key statistics (end-2022 / 2023 where stated) - Financial sector and banking shares: - Banking sector share of financial sector assets: 78.6 percent. - Total number of financial institutions: 2,111; total assets: 14,371,022 (billions of Rp); share of GDP: 73.4 percent. - Banking sector (including conventional and sharia commercial banks and rural banks): - Number of institutions: 1,547 - Assets (in billions of Rp): 11,295,623 - Share of total assets (in percent): 78.6 - Share of GDP (in percent): 57.7 - Commercial Banks: - Number: 106 - Assets (in billions of Rp): 11,113,321 - Share of total assets (in percent): 77.3 - Share of GDP (in percent): 56.7 - Rural Banks: - Number: 1,441 - Assets (in billions of Rp): 182,302 - Share of total assets (in percent): 1.3 - Share of GDP (in percent): 0.9 - Non-Bank Sector: - Number of institutions: 564 - Assets (in billions of Rp): 3,075,399 - Share of total assets (in percent): 21.4 - Share of GDP (in percent): 15.7 - Select non-bank subsector assets (in billions of Rp; share of total assets and share of GDP in percent): - Insurance Companies: 137 institutions; 1,343,691; 9.4; 6.9 - Finance Companies: 153 institutions; 497,237; 3.5; 2.5 - Pension Funds: 197 institutions; 342,030; 2.4; 1.7 - Venture Capital Companies: 55 institutions; 25,868; 0.2; 0.1 - Guarantee Institutions: 20 institutions; 34,490; 0.2; 0.2 - Infrastructure Finance Companies: 2 institutions; 140,836; 1.0; 0.7 - Mutual Funds: 504,306; 3.5; 2.5 - Other: 186,940; 1.3; 0.9 - State-owned banks: - Represent approximately 43 percent of total banking assets. - Four state-owned banks constitute 43 percent of the banking sector. - State-owned banks’ CET1 ratio: 19 percent (as of 2023Q1). - Market concentration: - Top 10 banks (including state-owned banks) hold 66 percent of total bank assets. - Financial Conglomerates (FCs): - FCs account for 88 percent of banking sector assets and almost 70 percent of financial system assets. ### Capital, profitability, liquidity and asset quality (selected indicators) - Capital ratios (as of 2023Q1): - Capital Adequacy Ratio (CAR): 25 percent - Tier 1 (T1): 23 percent - Common Equity Tier 1 (CET1): 21 percent - Risk-Weighted Assets (RWAs) density: around 62 percent - Leverage ratio: minimum is 3 percent (part of OJK’s capital framework) - Profitability: - Return on assets (December 2022): 2.43 percent - Return on assets (June 2022): 2.37 percent - Return on assets (December 2019): 2.44 percent - Net Interest Margin (NIM) (December 2022): 4.71 percent (June 2022: 4.69 percent) - Interest income composition: approximately 70 percent derived from loans - Liquidity measures: - Liquid assets-to-total assets ratio (December 2022): 30.49 percent (June 2022: 28.84 percent) - Deposit-to-loan ratio (December 2022): 126.93 percent - LCR (banking industry): approximately 200 percent from 2018 until April 2020; above 250 percent since October 2021; recorded at 244.20 percent in February 2023 - NSFR: pre-pandemic level at 125 percent; recorded at 140.42 percent in December 2022 - Credit risk and NPLs: - Gross NPL indicator (February 2023): 2.58 percent - Net NPL (February 2023): 0.76 percent - Highest NPL reached 3.35 percent in August 2021 ### Credit risk, forbearance, and provisioning - Supervisory practice: - Credit risk is prioritized in on-site examinations; typical on-site examination sampling approximately 25 credit files and 20–25 working days; focus on corporate, SME, retail, large exposures and related party loans. - Forbearance: loan classification relaxation extended till March 2024 for certain MSME and pandemic-affected sectors; outstanding restructuring loans and NPLs trending down. - Provisioning and classification: - Asset quality categories: Current, Special Mention, Substandard, Doubtful, Loss. - Prudential provisioning (as set): Performing – 1 percent; Special Mention – 5 percent; Substandard – 15 percent; Doubtful – 50 percent; Non-performing – 100 percent. - Collateral valuation: independent appraiser required for exposures > Rp10,000,000,000.00 (ten billion rupiah). ### Corporate governance, model risk, and stress testing - Regulatory updates: - OJK Regulation No. 17/POJK.03/2023 on Good Corporate Governance for Commercial Banks (issued September 14, 2023). - Findings and gaps: - Implementation by banks lags global standards; on-site assessments of governance effectiveness limited. - Need to strengthen BoC role in overseeing risk management and approving risk appetite. - Stress testing: OJK requires Bottom-Up Stress Testing (BUST) and conducts Top-Down Stress Tests (TDST) annually; guidance insufficiently specific to raise standards and fully integrate outputs into SREP/ICAAP assessments. - Model risk: greater supervisory scrutiny needed on model governance, validation, and independent risk-management role. - Recommendations: - Institute routine meetings between OJK and independent non-executive BoC members separate from management. - Integrate ICAAP results more fully into SREP and bank soundness assessments; enhance stress testing expectations and challenge banks’ assumptions. ### Related-party transactions and concentration risk - Regulatory limits and concerns: - Aggregate related party exposure limit: 10 percent of a bank’s capital (Tier 1 and Tier 2). - SOE exposures with full central government support: 30 percent of a bank’s capital for those exposures. - Shortcomings: - Definitions of related parties and “Provision of Funds” do not explicitly cover close family members, certain non-credit dealings, or some affiliated relationships. - Requirements scattered across regulations; supervisory verification of effectiveness limited. - Concentration risk: regulations focus mainly on credit-originated concentration; non-credit sources of concentration risk not explicitly captured bank-wide. - Recommendations: - Consider a dedicated consolidated regulation on related-party transactions; expand definitions; require prior BoC approval for write-offs related to related parties; explicitly require arm’s length terms and BoC member exclusion where conflicted. - Strengthen processes to assess non-credit concentration sources and pay greater attention to large concentrations to state-owned enterprises and sovereign bond exposures. ### Group supervision, reporting limits, and FSOL enhancements - Current practice: - OJK supervises banks on a solo and consolidated basis, monitors intra-group and related party transactions, and receives quarterly consolidated statements and intragroup exposures. - Limitation: - Previously OJK lacked explicit power to require reporting from non-financial and unregulated group entities, reducing visibility between on-site examinations. - FSOL effect: - FSOL strengthens OJK’s powers to include non-financial and unregulated group entities (Article 36A of FSOL); this enhances group-structure understanding, risk monitoring, and supervisory action. ### Corrective measures, enforcement, and transparency - Corrective powers: - OJK powers include written warnings, fines, requiring higher capital levels, limiting business activities, appointing statutory managers, administrative sanctions, issuing and revoking licenses, and determining failed/insolvent banks. - Observed over-reliance on breach notices and a case-by-case sanctioning approach rather than addressing systemic non-compliance. - Transparency and disclosure: - POJK 37/POJK.03/2019 and Circular letter 9/SEOJK.03/2020 require periodic public disclosures; banks publish monthly, quarterly, annual reports and corporate governance reports. - Basel Pillar 3 post-crisis disclosure requirements not yet fully incorporated; OJK plans implementation in 2024. - Shortcomings: inconsistent public disclosure quality (notably related party transactions and risk management practices). - Recommendations: - Adopt portfolio view of non-compliance to determine root causes and apply proportionate sanctions. - Implement structured process to assess banks’ public disclosures and enforce Pillar 3 enhancements. ### AML/CFT supervision and FIU cooperation - Regulatory framework and recent developments: - OJK Regulation No. 8/2023; OJK Regulation No. 23/POJK.01/2019 (amended); SEOJK 32/SEOJK.03/2017 for banking guidance. - Indonesia became a member of FATF as of October 25, 2023. - MER 2023 recommendations being implemented (CDD, UBO, enhanced risk-based supervision). - Supervisory gaps and recommendations: - Closer cooperation with FIU (PPATK) and more regular/granular information sharing recommended. - Mandate banks to have customer acceptance policies identifying relationships the bank will not accept based on risk. - Explicit requirement for banks to report suspicious activities of fraud to OJK when material to safety, soundness, or reputation. ### Macroprudential policy governance and KSSK coordination - KSSK composition and mandates: - KSSK comprises MOF, BI, OJK, and LPS; chaired by Minister of Finance. - Statutory objectives: identify/supervise SIFIs, systemic risk monitoring, recovery/resolution planning, contingency planning and crisis management. - FSOL 2023 enhancements: - Clarifies KSSK’s role; strengthens tools including PLJP arrangements from BI, LPS as resolution authority, and a Coordination Forum to strengthen macroprudential-microprudential-resolution coordination. - BI’s macroprudential cycle: - Identification → formulation → implementation → evaluation/monitoring. - BI coordinates with OJK; final macroprudential decisions rest with BI’s Board of Governor. - Crisis management and resolution roles: - OJK triggers resolution; LPS executes resolution actions (purchase and assumption, bridge bank, temporary capital placement, liquidation). - BI may provide crisis authorities such as purchasing SBN on primary market or repo SBN from LPS. - Government provides public backstop and capital injections to LPS if statutory capital falls below IDR4 trillion due to resolution actions. ### Islamic banking (ACP / CPIFR findings and OJK response) - Size and structure (as of July 2023): - Islamic banking assets share of total banking assets: 7.3 percent (2018: 6 percent). - Year-on-year growth rate: 13.6 percent. - Composition: 13 full-fledged Islamic commercial banks (66 percent of Islamic banking assets); 20 Islamic windows (31 percent); 171 Islamic rural banks (3 percent). - Dana Investasi Non Profit Sharing accounts for 82 percent of total deposits in Islamic banking; PSIA not widely offered. - Key issues and recommendations: - Shariah governance: finalize and implement new Shariah governance regulation (targeted in source material for early 2024 / subsequently issued OJK Regulation Number 2 of 2024). - Treatment of PSIA/IAHs, income smoothing, fiduciary duties, and liquidation/resolution treatment for investment accounts require clearer guidance and subsidiary legislation. - Islamic windows: FSOL authorizes OJK to request separation of Islamic windows to full banks; OJK to study LCR application at window level; recommend clear rules to prevent host bank withdrawals undermining window capital. - OJK response: issued Circular Letter Number 25/SEOJK.03/2023 (Dec 21, 2023) on Sharia risk management and OJK Regulation Number 2 of 2024 concerning Sharia governance (Feb 16, 2024). ### Principal assessments (selected) - Principle 1 (Responsibilities, objectives, powers): Largely Compliant with recommendation to explicitly prioritize safety and soundness in primary legislation. - Principle 2 (Independence): Materially Non-Compliant — concerns on ex-officio BoC membership, budget incorporation into State budget, and legal protection gaps. - Principle 8 (Supervisory approach): Largely Compliant — well-structured risk-based framework but needs enhanced discrimination and evidence base. - Principle 14 (Corporate governance): Materially Non-Compliant — significant shortcomings in evaluating implementation and effectiveness. - Principle 15 (Risk management): Materially Non-Compliant — supervisory execution needs strengthening in risk culture, ICAAP integration, stress testing, and model governance. - Principle 16 (Capital adequacy): Largely Compliant — however two deviations noted: zero-risk weighting on US dollar government bonds and pending implementation of Basel III market risk amendments (implementation date January 1, 2024). - Principle 17 (Credit risk): Largely Compliant — recommends more portfolio-level analysis and credit specialists. - Principle 18 (Problem assets): Compliant — strong regulatory framework and supervisory focus on asset quality and provisioning. - Principle 19 (Concentration risk): Largely Compliant — need broader bank-wide view beyond credit and better stress-testing of concentrations. - Principle 20 (Related parties): Materially Non-Compliant — definitions and coverage gaps; recommend consolidated regulation and stronger supervisory verification. - Principle 21 (Country and transfer risk): Materially Non-Compliant — limited attention and reporting requirements for country/transfer risk. - Principle 24 (Liquidity): Largely Compliant — full adoption of LCR/NSFR but deeper analysis of run-off assumptions and depositor behavior needed. - Principle 25 (Operational risk): Largely Compliant — strong IT/cyber capacity but need more non-IT operational risk specialists and deeper supervisory coverage. - Principle 27 (Financial reporting & external audit): Compliant — robust audit scope and communication, though prudential valuation adjustment guidance absent. - Principle 28 (Disclosure): Largely Compliant — improved but inconsistent disclosures; Pillar 3 enhancements to be implemented in 2024. - Principle 29 (AML/CFT): Largely Compliant — OJK implementing MER recommendations; closer FIU cooperation and improved CDD/UBO practices recommended. ### Selected actionable recommendations (condensed) - Legislation and governance: - Explicitly establish safety and soundness as OJK’s primary objective in primary law. - Strengthen OJK independence safeguards (reconsider ex‑officio Board membership, budget autonomy, Supervisory Board composition). - Operationalize legal protection for supervisors, including coverage of defence costs. - Supervisory methodology and capacity: - Enhance RBBR to increase risk sensitivity and discriminatory power; consider annual rating cadence. - Build specialist capacity: credit risk, operational risk (non-IT), accounting, model validation, Shariah risk. - Integrate ICAAP/stress testing outputs systematically into SREP and capital planning. - Data, valuation and SupTech: - Issue guidance on prudential valuation adjustments; establish a program for periodic verification of supervisory returns (e.g., RWA, LCR). - Related parties and concentration: - Consolidate related-party rules into a dedicated regulation; expand definitions; require arm’s length standards and BoC exclusion when conflicted. - Require bank-wide (and group-wide) measurement and stress testing of concentration risk beyond credit exposures. - Enforcement and transparency: - Adopt portfolio approach to non-compliance, apply proportionate and dissuasive sanctions, and improve transparency on supervisory actions and sanction statistics. - Implement structured review of banks’ public disclosures and incorporate Basel III Pillar 3 updated framework. - AML/CFT: - Strengthen OJK-FIU information sharing (regular, granular); require customer acceptance policies and explicit suspicious-fraud reporting to OJK when material. - Group supervision and cross-border cooperation: - Use FSOL powers to obtain information from non-financial/unregulated group entities. - Expand MoUs with foreign supervisors where material cross-border links exist. *Source: EXECUTIVE SUMMARY and selected chapters, 1idnea2024004-print-pdf (IMF staff assessment and OJK responses as presented in the provided content).* ### EXECUTIVE SUMMARY __________________________________________________________________________ 6 ### EXECUTIVE SUMMARY ### Key progress and institutional developments - The Financial Services Authority (OJK) has made substantial progress in updating its regulatory and supervisory frameworks since the last Financial Stability Assessment Program (FSAP) in 2017. - The OJK has implemented the Basel III post-crisis reforms and deployed Supervisory Technologies (SupTech) to increase supervisory efficiency. - The recently enacted Financial Sector Omnibus Law (FSOL) enhances OJK’s institutional set-up, powers, banking regulation and supervisory frameworks and clarifies the Financial System Stability Committee’s (KSSK’s) mandate for systemic risk monitoring and coordination. - New regulations on corporate governance have elevated the importance of good governance within the banking industry. ### Supervisory approach, capacity, and methodology - OJK achieves good baseline supervision but needs to build further supervisory capacity and enhance the supervisory framework to reach higher standards. - OJK’s risk methodology: - Is structured, incorporates key banking risks, and allows analysis of risk, risk management processes, corporate governance, earnings, and capital. - Allows flexibility and supervisory judgment across a supervision cycle that uses a six-point cycle beginning with the “know your bank” phase, frequent risk assessments, and annual on-site examinations. - Requires further enhancement to be more risk sensitive, discriminate riskiness adequately, and be based on sufficient evidence. - Recommendations for capacity building: - Invest in training and upskilling to enable more in-depth assessments of risk management and corporate governance. - Take a holistic, portfolio-level view of risks. - Better integrate ICAAP, stress testing, D-SIBs, and recovery plans into an enhanced supervisory framework. ### Legal framework, objectives, and independence - The primary legislation gives OJK broad objectives, including financial stability, financial sector development, credit growth, and consumer protection. - The FSOL introduced new responsibilities and strengthened powers (e.g., banks’ recovery, mergers and acquisitions, investigation). - Recommendation: Legislation should explicitly recognize the safety and soundness of banks and the banking sector as OJK’s primary responsibility to minimize ambiguity and potential conflicts between objectives. - OJK independence: - While OJK’s independence is specified in OJK Law, potential Government influence should be limited. - An Ex-officio member, typically Vice Minister of Finance, is part of the Board of Commissioners (BoC), which could lead to political interference and conflicts of interest—especially regarding state-owned banks. - The FSOL reforms OJK’s budget to be incorporated into the State budget; decisive actions are important to enhance OJK independence. - Legal protection for supervisors is crucial for effective, fearless supervisory actions. ### Evolving business models, liquidity, and credit risk supervision - OJK should continuously examine banks’ evolving business models to identify changing risk profiles early, given digitalization and other structural changes. - Liquidity supervision: - Need ongoing focus on segmentation of deposit liabilities and calibration of run-off assumptions in Liquidity Coverage Ratio (LCR) calculations. - Credit risk supervision: - Credit is prioritized in on-site examinations but would benefit from deeper analysis and greater coverage, supported by risk specialists. - A portfolio view is needed to draw conclusions about industry-wide credit risk standards, new lending risks relative to risk appetite, and the effectiveness of the second line of defense. - Better integration of banks’ Internal Capital Adequacy Assessment Programs (ICAAPs) and stress testing is needed to assess material risks against financial resources (capital and liquidity). ### Corporate governance, model risk, and stress testing - OJK has increased focus on corporate governance and issued new standards, but implementation by banks lags global standards. - Findings indicate a need to enhance on-site examinations of banks' corporate governance practices. - Recommendations: - Encourage the BoC to play a more effective role in overseeing risk management and approving risk appetite. - Implement routine meetings between OJK and independent non-executive BoC members separate from management. - Increase scrutiny of risk culture, model governance, model validation, and the role of independent risk management units. - Provide greater specificity in OJK expectations for stress testing to raise standards. - Integrate ICAAP results more fully into SREP and bank soundness assessments, including closer evaluation of capital planning and stress-test assumptions. ### Related-party transactions and concentration risk - Material enhancements are needed to mitigate risks from related party transactions and potential concentration risk sources: - Expand definitions, set clear governance requirements, and enhance supervision of related party transactions. - Strengthen processes to assess non-credit sources of concentration risk. - Give greater attention to large concentrations to state-owned enterprises, particularly where state-owned banks are systemically large and hold sovereign bond exposures. - Ensure these analyses are captured in banks’ ICAAP and assessed within SREP. ### Group supervision and data collection limits - OJK supervises banks on a solo and consolidated basis and monitors intra-group and related party transactions. - Limitation: OJK’s existing powers did not previously extend to require banks to report information about non-financial and unregulated entities within group structures, reducing visibility between on-site examinations. - The FSOL strengthens OJK’s powers to include non-financial and unregulated group entities, enhancing group-structure understanding, risk monitoring, and supervisory action. ### Corrective measures, enforcement, and transparency - OJK has broad corrective powers (e.g., written warnings, requiring higher capital levels, business limitations, administrative sanctions, license issuance and revocation). - Observed over-reliance on issuing breach notices for relatively minor compliance breaches. - Recommendation: Adopt a portfolio view of non-compliance to determine root causes and promote better risk management and governance. - Transparency and disclosure: - OJK has improved sector transparency and banks publish annual reports with financial and qualitative risk and governance information. - Consistency of public information remains an issue, especially regarding related party transactions and risk management practices. - Recommendation: Implement a structured process to assess banks’ public disclosures to raise standards and strengthen market discipline. ### AML/CFT supervision and FIU cooperation - Closer cooperation with the Financial Intelligence Unit (FIU) and enhanced bank requirements are needed to strengthen supervision of banks’ AML/CFT risk management. - While OJK and the FIU cooperate and share information, more regular and granular information sharing would better inform OJK’s risk assessments and on-site examination processes. - Indonesia became a member of the Financial Action Task Force (FATF) as of October 25, 2023. - At the time of assessment, OJK was implementing Mutual Evaluation Review (MER) recommendations addressing banking-sector shortcomings such as Customer Due Diligence and Ultimate Beneficial Owners. ### Assessment scope, methodology, and timing - This assessment of OJK’s implementation of the Basel Core Principles for Effective Banking Supervision (BCP) was part of the FSAP undertaken by the IMF and World Bank. - The assessment was performed during the first FSAP mission between September 20 to October 10, 2023, and reflects the regulatory and supervisory framework in place at the time. - The assessment used the BCP methodology issued by the Basel Committee on Banking Supervision (BCBS) in September 2012. - The 2012 revision increased supervisory requirements, added new principles and essential criteria (EC), and introduced additional criteria (AC). - The revised Core Principles contain 247 separate EC and AC against which supervisors may be assessed. - For this assessment, Indonesia chose to be assessed and graded against Essential Criteria (EC) only. *Source: EXECUTIVE SUMMARY, 1idnea2024004-print-pdf* ### 6. The team appreciated the cooperation received from the authorities. The team extends ### 6. The team appreciated the cooperation received from the authorities. The team extends ### Assessment approach and scope - The assessment evaluated compliance with the Basel Core Principles (BCPs) taking into account Indonesia’s financial system “sophistication and complexity.” - Proportionality underpins all assessment criteria: supervisory expectations should be commensurate with the complexity, interconnectedness, size, risk profile and cross-border operation of the banks being supervised. - The assessment focused on supervision of a mix of state-owned banks and private (commercial) banks and included the entire banking system. - A focused review of Islamic banking regulation and supervision was carried out against the five additional core principles (ACPs) specific to Islamic banking in the Core Principles for Islamic Finance Regulation (Banking Segment) (CPIFR); results are provided in Annex 1. ### Banking system structure and key statistics (end-2022 / 2023 where stated) - Banking sector share of financial sector assets: 78.6 percent. - Total number of financial institutions: 2,111; total assets: 14,371,022 (billions of Rp); share of GDP: 73.4 percent. - Banking sector (including conventional and sharia commercial banks and rural banks): - Number of institutions: 1,547 - Assets (in billions of Rp): 11,295,623 - Share of total assets (in percent): 78.6 - Share of GDP (in percent): 57.7 - Commercial Banks: - Number: 106 - Assets (in billions of Rp): 11,113,321 - Share of total assets (in percent): 77.3 - Share of GDP (in percent): 56.7 - Rural Banks: - Number: 1,441 - Assets (in billions of Rp): 182,302 - Share of total assets (in percent): 1.3 - Share of GDP (in percent): 0.9 - Non-Bank Sector: - Number of institutions: 564 - Assets (in billions of Rp): 3,075,399 - Share of total assets (in percent): 21.4 - Share of GDP (in percent): 15.7 - Select non-bank subsector assets (in billions of Rp; share of total assets and share of GDP in percent): - Insurance Companies: 137 institutions; 1,343,691; 9.4; 6.9 - Finance Companies: 153 institutions; 497,237; 3.5; 2.5 - Pension Funds: 197 institutions; 342,030; 2.4; 1.7 - Venture Capital Companies: 55 institutions; 25,868; 0.2; 0.1 - Guarantee Institutions: 20 institutions; 34,490; 0.2; 0.2 - Infrastructure Finance Companies: 2 institutions; 140,836; 1.0; 0.7 - Mutual Funds: (number not listed); 504,306; 3.5; 2.5 - Other: (number not listed); 186,940; 1.3; 0.9 - State-owned banks: - Represent approximately 43 percent of total banking assets. - Four state-owned banks constitute 43 percent of the banking sector. - State-owned banks’ CET1 ratio: 19 percent (as of 2023Q1). - Market concentration: - Top 10 banks (including state-owned banks) hold 66 percent of total bank assets. - Financial Conglomerates (FCs): - FCs account for 88 percent of banking sector assets and almost 70 percent of financial system assets. ### Nonbank financial institutions and fintech - NBFIs assets make up 21 percent of the overall financial sector. - NBFI investment allocation: 81 percent to capital markets, 14 percent in the banking sector, 5 percent in other assets (direct placement, property, etc.). - FinTech lending companies: - Total assets: 6.5 trillion Indonesian Rupiah (IDR). - Asset growth in 2022: 51 percent. - Lending growth in 2022: 63 percent. ### Regulatory and supervisory framework - Regulatory split: - OJK (Otoritas Jasa Keuangan) has authority to regulate and supervise the banking sector from a microprudential perspective. - BI (Bank Indonesia) conducts regulation and surveillance of the banking sector from a macroprudential perspective. - OJK responsibilities and powers: - Established under Law Number 21 of 2011 as lastly amended by Law Number 4 of 2023 concerning Development and Strengthening of FSOL. - Covers banks, insurance, pension funds, finance companies and other financial services, and capital markets. - Full responsibility for prudential and market conduct supervision, and consumer protection. - Powers include issuing legally binding regulations, collecting information from regulated institutions and their parents and subsidiaries, and imposing corrective actions and sanctions (including written orders, requiring higher capital levels, limiting business activities, appointing a statutory manager, administrative sanctions, issuing and revoking business licenses, and determining a bank as failed or insolvent). ### Capital, profitability, liquidity and asset quality (most recent figures) - Capital ratios (as of 2023Q1): - Capital Adequacy Ratio (CAR): 25 percent - Tier 1 (T1): 23 percent - Common Equity Tier 1 (CET1): 21 percent - Risk-Weighted Assets (RWAs) density: around 62 percent - Leverage ratio: part of OJK’s capital framework; minimum is 3 percent - Profitability: - Return on assets (December 2022): 2.43 percent - Return on assets (June 2022): 2.37 percent - Return on assets (December 2019): 2.44 percent - Net Interest Margin (NIM) (December 2022): 4.71 percent (June 2022: 4.69 percent) - Interest income composition: approximately 70 percent derived from loans - Liquidity measures: - Liquid assets-to-total assets ratio (December 2022): 30.49 percent (June 2022: 28.84 percent) - Deposit-to-loan ratio (December 2022): 126.93 percent - LCR (banking industry): maintained above required level; approximately 200 percent from 2018 until April 2020; above 250 percent since October 2021; recorded at 244.20 percent in February 2023 - NSFR: maintained above required level for the last two years; pre-pandemic level at 125 percent; recorded at 140.42 percent in December 2022 ### Credit risk, forbearance, and NPLs - Credit risk trends: - Gross NPL indicator (February 2023): 2.58 percent - Net NPL (February 2023): 0.76 percent - Highest NPL reached 3.35 percent in August 2021 - Legacy of COVID-19: - Legacy portfolio of restructured assets from the COVID-19 pandemic remains. - Outstanding restructuring loans, loan-at-risk and NPLs have shown a declining trend. - Loan classification relaxation extended till March 2024; coverage tightened but remains broad, covering loans to MSMEs and companies in pandemic-hampered or labor-intensive sectors (accommodation, food and beverage, textile, and footwear). - Loan forbearance measures can mask vulnerabilities related to delays in credit loss recognition, impacting NPLs, profitability, and capital ratios. ### Recent legal and institutional developments - 2023 Financial Sector Law (FSOL): - Revises 17 institutional and sectoral laws to strengthen financial efficiency and resilience. - Authorizes BI with a macroprudential policy mandate. - Expands the role of the Indonesia Deposit Insurance Corporation (LPS). - Strengthens OJK’s supervisory and regulatory framework. - Sets the legal foundation for a central bank digital currency. ### Macroeconomic environment and preconditions for supervision - Growth and inflation: - Growth in 2023 estimated at 5.0 percent. - Growth in 2024 projected at 5.0 percent. - Headline and core inflation (December 2023): 1.8 and 2.6 percent respectively. - BI’s revised inflation target range for 2024: +2.5±1 percent. - Labor market: - Unemployment rate fell to 5.3 percent in the second-half of 2023. - External sector: - Current account deficit: expected 0.1 percent of GDP in 2023; projected to widen to 0.8 percent of GDP in 2024. - External debt (2023): 28.3 percent of GDP, projected to decline over the medium-term. - Gross international reserves (end-2023): about US$146 billion. - Fiscal and monetary policy: - Fiscal rule’s deficit ceiling of 3 percent of GDP restored starting 2023; fiscal outturns within this ceiling in 2022 and 2023. - Public debt (2022): 40.1 percent of GDP. - BI’s policy response to 2022 inflation surge: policy rate hiked by 225 basis points to 5.75 percent over August 2022—January 2023; one-off off-cycle hike of 25 bps in October. - BI reduced its target band by 50 basis points to 2.5±1 percent in 2024. - BI policy measures to support intermediation and stability: - Maintained accommodative macroprudential policies to support credit growth; pandemic-era loosening such as LTV and FTV limits at 100 percent and downpayment reductions to 0 percent have been maintained. - October 2023: Macroprudential Liquidity Buffer was lowered. - Credit growth: 9.1 percent y/y in November 2023, returned to pre-pandemic rates. - Money market and capital inflow measures: ended Operation Twist; introduced Bank Indonesia Rupiah Securities, Bank Indonesia Foreign Currency Securities, and Bank Indonesia Foreign Currency Sukuk. ### Macroprudential policy governance - At BI, macroprudential policy objectives: prevent and mitigate systemic risk, promote balanced and sustainable intermediation, and financial inclusion. - Policy formulation cycle: identification and assessment of intermediation function, systemic risk, and inclusion; formulation of recommendations; policy implementation; evaluation and monitoring. - Decision-making: - Governed by internal regulations, with the Board of Governors' Meeting as the highest forum for strategic policy decisions. - Safeguarding financial stability is a shared responsibility among KSSK members; BI cooperates with other financial authorities for feedback. - Final decision on macroprudential policies rests with BI’s Board of Governor during its meeting. *Source: IMF staff assessment as presented in the provided content.* ### 28. As stipulated in the FSOL, maintaining financial system stability is a shared ### 28. As stipulated in the FSOL, maintaining financial system stability is a shared ### KSSK membership and mandates - KSSK comprises of four agencies: Ministry of Finance (MOF), BI, OJK, and LPS. - Roles: - Ministry of Finance (MoF): fiscal authority and general policy in financial system. - BI: monetary, payment system, and macroprudential authority; lender of the last resort function. - OJK: integrated financial regulator and supervisor. - LPS: deposit insurance and resolution authority. - Coordination and synergy between authorities is necessary in maintaining financial system stability. ### FSOL amendments and strengthened instruments (2023) - FSOL amended the PPKSK Law in 2023, clarifying KSSK’s role and strengthening member institutions’ authorities. - Strengthened instruments include: - Bank recovery and resolution plans. - Arrangements for short-term liquidity assistance (PLJP) from BI. - Affirmation of LPS as a resolution authority with a mandate as risk minimizer. - Strengthened macroprudential-microprudential-resolution coordination via a new Coordination Forum. - KSSK statutory objectives and responsibilities include: - Identifying and supervising systemically important financial institutions. - Systemic risk monitoring and financial stability in general. - Recovery and resolution planning and actions. - Contingency planning and crisis management in particular. - BI’s examinations of banks and related institutions are held based on the assessment of Systemic Risk and are coordinated with relevant authorities. ### Macroprudential policy framework and BI policy mix - Ongoing process to revisit macroprudential policy framework leading to amendment of BI Regulation (PBI) and Board of Governor Regulation (PDG). - FSOL stipulates macroprudential policy applies to banks operating conventionally and based on Sharia Principles, taking into account assessment of the Financial System as a whole and its relation to economic conditions. - Macroprudential policy is part of BI’s policy mix: monetary policy, payment system policy, and macroprudential policy. - Policy formulation must optimize three aspects: stability, growth, and inclusion, considering risk factors: - cyclical risk (time series dimension), - systemic risk (macro-financial linkage and interconnectedness), - structure risk (risks from weakness in economic structure). - BI’s macroprudential policy formulation cycle: identification and assessing intermediation function, systemic risk, and inclusion in financial system → formulating recommendation and policy implementation → evaluation → monitoring. ### Macroprudential–microprudential Coordination Forum and inter-agency cooperation - Coordination Forum discusses matters related to individual banks' performance and compliance with macroprudential and micro-prudential regulations. - Coordination forum covers: - Exchange of data/information on supervision results and macro surveillance. - Implementation of bank monitoring. - Joint studies and/or research. - Formulation of Indonesian/consolidated stances on international issues. - Exchange of information for community socialization and education. - Payment system. - Collaboration between BI representative offices and OJK regional offices. - Provision of short-term liquidity loans. - BI and OJK are reformulating the mechanism and scope of inter-institutional coordination following FSOL mandate expansions; similar forums could be held with other authorities such as LPS. ### Communication and public outreach - Financial stability and macroprudential policy responses are integrated into BI’s policy mix communication: - Presented in the press release of the monthly Board of the Governor’s Meeting. - KSSK issues press statements. - Financial Stability Review published per semester provides comprehensive financial system development, policy response, and forecast; materials accessible on the BI website. - BI engages with parliament, banks and financial sectors/businesses, academics, and other relevant institutions; BI periodically delivers speeches, public lectures, and seminars. - KSSK issues press statements after their meetings. ### Legal and institutional framework for business and property - Separation of power between Judiciary and Parliament/Executive; only a court can exercise judicial power. - Corporate law: Law No. 40 year 2007 concerning Limited Liability Company governs corporate requirements, governance, reporting, winding up, and expiry of legal status. - Private property law: Law 5 of 1960 as amended by Law No. 11 of 2020 recognizes individual rights to own and possess property. - Bankruptcy law: Law No. 37 of 2004 governs bankruptcy proceedings, administrators, debt payment plans, and asset distribution. - Consumer protection: Law 8 of 1999; financial customer protection: Law No. 21 of 2011 concerning Indonesia Financial Services as lastly amended by Law No. 4 of 2023 concerning Development and Strengthening of Financial Sector. ### Accounting, auditing, and credit information infrastructure - Indonesian accounting standards aligned with IFRS equivalents; effective January 1, 2015 convergence with IFRS effective January 1, 2014; most IFRSs issued and effective on or after January 1, 2021 have the same SAK equivalents with same effective dates. - Audits conducted in accordance with Indonesia Professional Standards on Auditing adopted from International Standards on Auditing (IAASB). - External auditors of supervised entities of OJK subject to a stringent accreditation standards program. - Credit bureaus: public and private. Public credit bureau is Financial Information Service System (SLIK) administered by OJK; private credit bureaus regulated by OJK. ### Payment systems and financial market infrastructures - BI has primary regulatory responsibility for Indonesia’s payments system and operates high value payments systems, including BI—Real Time Gross Settlement (BI-RTGS) and BI—Scripless Securities Settlement System (BI-SSSS). - Financial market infrastructures consist of: - Systemically Important Payment Systems: BI-RTGS (high-value payments) and BI-FAST (retail fast payments), regulated and operated by BI. - CSD & SSS: - BI-SSSS for Monetary Operation instruments and Government Bonds, regulated and operated by BI. - C-BEST KSEI for equity, regulated by OJK and operated by KSEI. - CCP: - E-BOCS for government bonds clearing, regulated by BI and operated by KPEI. - E-CLEAR for equity, regulated by OJK and operated by KPEI. - BI is developing CCP and TR for money market instruments as recommended by G20/FSB reforms. - Infrastructures are developed, regulated, and operated in compliance with the Principles for Financial Market Infrastructures (IOSCO-CPMI), accounting for legal, operational, credit, liquidity, and other risks to ensure resilience and financial stability. ### Payment system supervisory and consumer protection objectives - BI’s mandate: regulate and supervise banks to ensure a fast, easy, affordable, safe, and reliable payment system while observing stability, access expansion, consumer protection, sound business practices, and best practices. - Banks providing payment system services must obtain a license from BI as a payment service operator and seek BI approval for developing payment system products and activities. - Payment system supervision aims to achieve operation objectives, encourage innovation, and adhere to international standards including risk management, security standards, consumer protection, anti-money laundering and counter-terrorism financing. - BI can impose administrative sanctions for non-compliance and performs market-conduct supervision to prioritize consumer interests and strengthen consumer confidence. ### Crisis management, recovery, and resolution (KSSK coordination) - KSSK (OJK, LPS, BI, MOF) coordinates financial stability and crisis management; FSOL (2023) strengthened KSSK roles and instruments for preventing and handling bank problems. - National Crisis Management Protocol (CMP): - Each KSSK member prepares a CMP according to its authorities: - OJK—Banking, Nonbank, and Capital Market CMP. - BI—Exchange rate and macroprudential CMP. - LPS—deposit insurance/resolution CMP. - Ministry of Finance—CMP Fiscal and government bonds. - KSSK Secretariat coordinates monitoring reports periodically or under conditions that potentially endanger financial sector stability; CMPs are regularly reviewed. - KSSK may hold meetings face-to-face or via information technology to formulate and determine necessary measures. ### Roles and operational procedures during bank distress - OJK (in coordination with BI and LPS) establishes a list of systemic banks, updated regularly every six months. - Systemic banks must comply with special provisions on capital and liquidity adequacy ratios and prepare recovery plans including obligations of controlling shareholders/other parties and certain types of convertible debt. - FSOL expands the obligation to prepare recovery plans for banks beyond systemic banks; OJK is preparing amendment to POJK Recovery Plan. - Liquidity assistance (PLJP) from BI: - A bank experiencing liquidity difficulties can apply for PLJP to BI. - In granting PLJP, OJK evaluates compliance with solvency requirements and bank soundness level (TKS). - BI and OJK assess collateral requirements and the bank’s ability to return PLJP. - If a bank is designated as a bank under restructuring (Bank Dalam Penyehatan/BDP) and does not meet PLJP requirements, OJK coordinates with LPS regarding placement of LPS funds into the bank. - Resolution triggering and execution: - Under Banking Law and OJK Law, OJK is responsible for triggering resolution of banks and hands over the resolution process of a failed bank directly to LPS as the resolution authority. - For systemically important banks, OJK will report to KSSK and KSSK will coordinate member support for the LPS resolution strategy. - LPS resolution tools include purchase and assumption, bridge bank transfers, temporary capital placement, or liquidation (especially for non-systemic banks). - If a financial system crisis endangers the national economy, KSSK recommends to the President a systemwide Banking Restructuring Program conducted by LPS. ### Resolution planning, resolvability assessments, and LPS powers - Article 18C (PPKSK Law as amended by FSOL): - LPS assesses resolution plans submitted by all banks and gives approval based on evaluation results. - LPS may conduct resolvability assessments against approved resolution plans to identify impediments to implementation. - If impediments are found, LPS requests corrective action in writing after coordinating with OJK (Article 18C, paragraphs (6) and (7)). ### BI crisis authorities during financial stress - BI may during a financial crisis: - purchase Financial Instruments Issued by the Indonesian Government (SBN) on the primary market to address financial system problems that endanger national economy; - buy/reverse repo SBN from LPS for handling bank problems; - provide access to funding for corporations/private companies by repo SBN owned by corporations/private companies through banks. ### Public backstop and LPS capitalization - Government provides a public backstop to address liquidity difficulties faced by LPS. - Government provides capital injections to LPS if LPS statutory capital is below IDR4 trillion as a result from LPS actions to save banks and manage banking crises (per LPS Law). ### KSSK decision-making and systemic protection - KSSK established in 2016 under PPKSK Law, amended through FSOL in 2023; chaired by the Minister of Finance and comprises the Chairman of OJK, Governor of BI, and Chairman of LPS. - Decisions are principally intended to be made by consensus; if consensus cannot be reached, PPKSK Law provides for a majority vote. - Voting members: the Minister, Governor of BI, and Chairman of OJK, each with one vote. - KSSK’s roles in prevention and resolution include: - Identifying and supervising systemically important financial institutions (OJK mandated for microprudential oversight; BI mandated for macroprudential policy under Article 35A and Article 35B of BI Law as amended by FSOL). - Systemic risk monitoring and financial stability via institution-specific CMPs and BI macroprudential assessments. - Contingency planning and crisis management: OJK requirements for recovery plans, early intervention, monitoring, and escalation to BDP/BDR statuses; LPS resolution actions when supervisory status reaches BDR; KSSK coordination for measures supporting LPS resolution (Article 16E, paragraph 3, FSOL). _International Monetary Fund — Indonesia (extract)._ ### 48. OJK has issued regulations to strengthen market discipline in the banking sector. ### OJK has issued regulations to strengthen market discipline in the banking sector. ### OJK regulations to strengthen market discipline - OJK Regulation No. 17/POJK.03/2023 on The Implementation of Good Corporate Governance for Commercial Banks: covers corporate governance, incentive structures for the hiring and removal of Board of Directors (BoD) and BoC members, protection of shareholders’ rights, and disclosure of corporate governance in banks. - OJK Regulation No. 37/POJK.03/2019 on Transparency and Publication of Commercial Banks’ Report and OJK Regulation No. 18/POJK/03/2017 on Reporting and Requesting of Debtor’s Information through Financial Information Service System (SLIK): address availability of market and consumer information and tools for the exercise of market discipline such as mobility of deposits and other assets held in banks. - OJK Circular Letter No. 34/SEOJK.03/2017 on Transparency of Prime Lending Rate: addresses periodicity of interest rate and other price quotes. - OJK Regulation No. 41/POJK.03/2019 on The Merger, Consolidation, Acquisition, Integration, and Conversion of Commercial Bank and Government Regulation No. 29 of 1999 on Merger, Consolidation, and Acquisition of Commercial Bank: provide the framework for mergers, takeovers, and acquisitions of equity interests of commercial banks; these regulations apply for domestic and foreign investors. - OJK Regulation No. 12/POJK.03/2021 on Commercial Bank and OJK Regulation No. 56/POJK.03/2016 on Bank’s Ownership: cover the ownership of the commercial bank; these regulations apply for domestic and foreign investors. ### A. Principles 1–2 Objectives, Powers, and Independence — main findings and issues - Since 2014, OJK is responsible for microprudential banking supervision in Indonesia; OJK was established in 2011 as an integrated regulator; banking supervision responsibilities were transferred from the Bank of Indonesia at the end of 2013. - The responsibilities and objectives of the OJK are defined in the OJK Law and Banking Law. - The clarity of OJK’s mandate for banking supervision needs to be enhanced: - The 2017 FSAP recommendation on giving primacy to the objective of safeguarding financial stability has been partially addressed in the FSOL 2023. - The objective of the OJK is, inter alia, to “actively maintain financial system stability.” - Primary legislation lacks a provision to OJK’s mandate to promote safety and soundness of individual banks and the banking system (S&S mandate). - The broad S&S mandate must be effectively translated to the operational level, particularly in determining OJK’s risk tolerance. - Lack of clarity regarding the S&S mandate leaves considerable room for interpretation, making assessment of supervisors’ effectiveness and timely corrective and sanctioning measures challenging. - Recommendation: Legislation should explicitly recognize safety and soundness as OJK’s primary responsibility to minimize ambiguity between OJK’s multiple objectives (financial stability, financial sector development, credit growth objectives, and consumer protection). - FSOL 2023 introduced new responsibilities and strengthened powers for OJK (e.g., banks’ recovery, mergers and acquisitions, investigation). - Strategic frameworks referenced: Indonesian Financial Services Sector Master Plan 2021-2025; Roadmap of Indonesian Banking Development 2020–2025. - OJK’s independence concerns: - OJK Law specifies independence, but potential Government influence remains (an Ex-officio BoC member, typically Vice Minister of Finance). - Presence of Vice Minister of Finance on BoC could lead to political interference and conflict of interest, especially for state-owned banks. - FSOL 2023 reforms ahead: incorporating OJK’s budget into the State Budget and creation of the OJK Supervisory Board with Government representatives—both raise potential concerns for independence. - Recommendation: enhance OJK independence and ensure it operates free from undue Government interference. - Capacity and resourcing: - Need to further develop supervisors’ capacity, skills, and innovative technologies; OJK requires a significantly larger budget for FSOL 2023 implementation. - Areas for growth: accounting and corporate governance risk specialists, credit risk, operational risk (non-IT). - OJK offers competitive remuneration for new junior staff but faces challenges recruiting risk specialists; recommendation to perform benchmarking and ensure salary scales and benefits attract and retain qualified staff. - OJK lacks a system for differentiating departments by importance and responsibilities. - Legal protection and operationalization: - FSOL 2023 provides that Chairperson, Vice Chairperson, BoC members, officials, and employees cannot be prosecuted if they act in good faith and per legal provisions and that actions under the Law are not subject to lawsuits to the State Administrative Court. - Law states staff facing lawsuits related to duties shall receive legal assistance from the institution. - OJK has an internal regulation (2014) covering legal assistance and financing for legal support. - Gap: OJK Law does not explicitly state that OJK and its staff are protected against the costs of defending their actions/omissions; recommendation to operationalize FSOL 2023 provisions and ensure costs of defending will be covered. - OJK powers: - OJK Law allows issuance of legally binding regulations and collection of necessary information from regulated institutions, parent companies, and related parties. - Corrective actions and sanctions available: written warnings, requiring higher capital levels, limiting business activities, appointing a statutory manager, imposing administrative sanctions, issuing and revoking bank licenses, and determining a bank as failed or insolvent. ### B. Principles 3 and 13 Supervisory Cooperation and Cross-Border Supervision - Legal framework requires authorities to develop and maintain a system for information exchange. - Formal arrangements exist for OJK’s cooperation with domestic authorities involved in financial stability. - MoUs, established procedures, and improved coordination have reduced overlap among authorities. - BI can directly examine banks with prior notification to OJK but cannot convey financial soundness assessments to banks; LPS can undertake on-site examinations related to its functions. - BI and OJK MoU (2013) on coordination on micro and macroprudential policy; OJK and LPS MoU (2020) on coordination on recovery and resolution (recently updated). - SAPIT system contains banks’ data; a Coordination Forum involving BI, LPS, and OJK foreseen under FSOL 2023 may help achieve better coordination. - While domestic coordination arrangements work in practice, there is opportunity for enhancement. - Cross-border cooperation: - OJK has established nine MoUs with foreign supervisors where material cross-border operations exist; more MoUs are needed. - Despite numerous foreign bank subsidiaries and branches in Indonesia and Indonesian banks with overseas subsidiaries and branches, OJK has not established formal arrangements with certain foreign supervisors. - Lack of formal arrangements could hinder supervision, notifications of potential issues in foreign parent banks, and transmission of confidential information. ### C. Principles 4–7 Licensing, Changes in Control, and Major Acquisitions - Banking sector consolidation reforms require a good framework for transfer of significant ownership and major acquisitions, with suitability assessments of ultimate beneficial owner (UBO). - Since 2018, OJK has received and approved 21 applications for transfer of shareholders. - In practice, banks request supervisory prior approvals for ownership transfers exceeding 25 percent threshold; the ‘control’ criteria have not been utilized recently. - Prior approval is required for changes in beneficial ownership. - Gaps and recommendations: - Regulations do not provide a separate definition of ‘significant ownership’; it is included in ‘controlling shareholder’ definition (ownership of equal or more than 25 percent). - Definition of ‘controlling shareholder’ and rejection conditions do not explicitly mention beneficial ownership, only “control of the bank, either directly or indirectly.” - No explicit requirement to notify OJK of material information that may negatively affect the suitability of a major shareholder or a party that has control. - Enhancing fit and proper criteria for members of banks' BoC, especially independent members, would contribute to safety and soundness. ### D. Principles 8, 9, and 10 Supervisory Approach, Tools, and Reporting - Indonesia as G-20 member and BCBS member committed to implementing BCBS standards with appropriate national adjustments. - OJK prioritizes timely implementation of the Basel framework; most regulations for Basel III post-crisis reforms have been issued recently. - OJK is in the process of issuing regulations for margin requirements for non-centrally cleared derivatives and capital requirements for CCPs. - Supervisory approach and capacity: - OJK’s risk methodology is well structured, incorporates key banking risks, and supports analysis of risk, risk management processes, corporate governance, earnings, and capital. - Methodology allows flexibility and supervisory professional judgment through the supervision cycle. - Supervisory approach uses a six-point cycle beginning with “know your bank”, frequent risk assessments, and annual on-site examinations. - Supervisors gather comprehensive information; quantitative analysis is highly developed. - Needs: further enhancement of risk rating methodology to be more risk sensitive, adequately discriminate riskiness, and be based on sufficient evidence. - Investment in training and upskilling recommended for in-depth assessments of risk management and corporate governance. - Recommendation: take a holistic view of risks at portfolio level and better integrate D-SIBs, Basel Pillar 2 (ICAAP, SREP), recovery framework, stress testing, and business model analysis into supervisory framework. - Data collection and SupTech: - OJK has comprehensive powers to collect supervisory data; reporting frequencies include daily, monthly, quarterly, semi-annually, and annual reports via an online reporting system. - OJK deployed automatic software solutions to verify and validate data submitted by banks. - During 2022, OJK invested heavily in SupTech to increase automation of data collection and processing to support timely analysis by supervisors. - Onsite examinations review validity and integrity of supervisory reporting. - Data quality and valuation guidance gaps: - OJK should implement a program for periodic verification of supervisory returns; current practice includes validation checks and onsite IT risk specialist verification but lacks a formal program to systematically verify supervisory information. - OJK has not issued specific guidance for valuation adjustments; banks comply with accounting rules, and OJK has power to require adjustments for capital adequacy but has not exercised it in practice. - Assessors found room to improve verification of banks’ valuation frameworks and control procedures, governance processes, and independent verification by the second line of defense. - Recommendation: issue guidance for valuation adjustments and establish a program for periodic verification of supervisory returns. ### E. Principles 11 and 12 Corrective Measures and Consolidated Supervision - Corrective measures and enforcement: - OJK has a broad range of powers and employs onsite and offsite activities supporting an early intervention model. - Powers include written warnings, fines, downgrade of bank’s soundness level, freezing certain business activities, dismissing board and management, and revoking licenses. - Observation: onsite examinations do not appear to sanction systematic and repeated breaches of regulations; application of fines often follows a case-by-case or file-by-file approach. - Consolidated supervision: - OJK supervises each banking group on a consolidated basis, undertaking intensive supervision on solo and group-wide basis and performing risk assessments standalone and consolidated. - OJK monitors intra-group and related party transactions and requires board and management oversight of foreign operations. - OJK conducts prudential reviews and visits covering cross-border activities of Indonesian banking groups with relatively significant exposures. - Bilateral supervisory relationships with several host supervisors enable mutual exchange of information. - Limitation and remedy: - OJK’s powers do not extend to require reporting on non-financial and unregulated entities within broader group structures (financial conglomerates); this is the only limitation on data gathering and surveillance. - To overcome limitation, assess intra-group exposures during onsite examinations; risk build-up between onsite exams could expose groups to material unmonitored risks. - FSOL strengthens OJK’s powers to include non-financial and unregulated entities within a group, enhancing group understanding, monitoring, and action on risks. ### F. Principles 14, 26–28 Corporate Governance, Audit, and Financial Reporting - Corporate governance priority: - OJK has increased focus on corporate governance and elevated its importance in the banking industry. - Further efforts needed to strengthen BoC role and responsibilities, independent checks and balances, and oversight of BoD activities. - In 2023, OJK issued an updated regulation on corporate governance. - Recommendation: develop a more holistic view of banks’ corporate governance and conduct more comprehensive on-site assessments of CG policies, processes, and practices, with particular focus on effectiveness of the BoC and their committees and control functions. - A capacity-building program is necessary to prepare supervisors for comprehensive assessments; a holistic CG assessment should be a key component of banking supervision. *Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1idnea2024004-print-pdf.pdf* ### 68. OJK has issued regulation concerning Guidance of Internal Control System Standard ### OJK has issued regulation concerning Guidance of Internal Control System Standard ### Internal control system standard - OJK requires Banks to ensure an effective internal control system. - OJK determines that banks have adequate internal control frameworks to establish and maintain a properly controlled operating environment taking into account their risk profile. - Expected elements include: - clear arrangements for delegating authority and responsibility; - separation of the functions that involve committing the bank, paying away its funds, and accounting for its assets and liabilities; - reconciliation of these processes; - safeguarding the bank’s assets; - appropriate independent internal audit and compliance functions to test adherence to these controls as well as applicable laws and regulations. ### Transparency and disclosure - OJK has improved standards of transparency and disclosure for banks and for itself, including implementation of Basel Pillar 3 requirements. - The disclosure requirements of the Basel III post-crisis regulatory reforms have not yet been incorporated. - Indonesian banks publish annual reports and corporate governance reports and disclose a comprehensive suite of information on their websites. - Shortcomings: - consistency of public information is an issue, especially coverage of risk management strategies and practices and related party transactions. - Recommendation: - OJK should implement a more structured process to assess banks’ public disclosures to raise disclosure standards and enhance transparency and market discipline. ### Principle 16 — Capital adequacy - OJK has implemented the Basel III capital framework establishing minimum capital ratios and buffers that reflect higher levels of minimum capital for systemically important banks. - Banks report healthy capital buffers above regulatory minimums. - OJK routinely performs a comprehensive assessment of the adequacy of capital against all material risks and applies SREP assessments and capital add-ons. - Two deviations from Basel III identified: - zero-risk weighting on government bonds issued in US dollars and central bank debt (0 percent weight) while banks’ exposures to US denominated government securities remain material; - Basel III amendments to calculating regulatory capital for market risk will be implemented January 1, 2024; currently banks use the Basel II framework to calculate regulatory capital. - The BCBS’s RCAP assessment identified these issues in its conclusions. ### Principles 15, 17–25 — Risk management (overview) - OJK has issued regulations setting expectations for comprehensive risk management processes covering identification, measurement, evaluation, monitoring, reporting and control/mitigation of all material risks, and assessment of capital and liquidity adequacy relative to risk profile and market/macro conditions. - Requirements extend to contingency arrangements (including recovery plans mainly for D-SIBs). - Supervisory practice: - annual onsite examination is primary activity to assess quality of risk management; - OJK meets with BoD, BoC, CRO, Head of Compliance, internal and external audit throughout supervisory cycle; - assessment of bank soundness ratings (semiannually) evaluates risk management against all material risks and links to capital and liquidity (SREP). - The process is described as structured and well embedded. ### Risk culture, models, ICAAP and stress testing (gaps) - Areas needing greater OJK attention: - assessing a bank’s risk culture, relationship between three lines of defense, and role of risk in decision-making; - deeper analysis of models, model governance, model validation, and independent risk management unit’s verification/validation role; - more evaluation of ICAAP, capital planning, and questioning underlying assumptions (including stress testing inputs). - Current limitations: - depth of ICAAP analysis is limited; ICAAP results not fully integrated into bank soundness assessments and SREP; - OJK regulations on stress testing are not sufficiently specific to encourage better standards; - limited evidence that stress-testing outputs are used to assess capital adequacy and to inform capital management decisions (such as dividend payout ratio). ### Credit risk - Credit risk is a major risk and consumes majority of risk-weighted assets. - OJK regulations require robust credit risk management covering full credit lifecycle: underwriting, evaluation, ongoing management of loan and investment portfolios. - OJK assesses implementation of credit risk management, including counterparty credit risk and concentration risk. - OJK has regulations on identification and management of problem assets and maintenance of adequate provisions and reserves. - Recommendation: - allocate greater resources to credit risk specialists to support onsite activities and enable more granular, portfolio-level assessments of credit risk standards, new lending risks vis a vis risk appetite, and effectiveness of independent challenge by the 2LOD. ### Liquidity risk and Basel III liquidity framework - OJK has implemented Basel III liquidity framework including the LCR and NSFR and related risk management principles. - RCAP assessments: - LCR regulation rated compliant in 2016; - NSFR RCAP assessment in 2020. - Supervisory practice: - OJK regularly assesses liquidity through ongoing offsite surveillance and receives a range of liquidity indicators in addition to LCR and NSFR. - Financial analysis, business plan data, and risk appetite data are strengths of OJK’s approach. - Areas for deeper analysis: - assumptions behind run-off rates; - segmentation of liabilities and assessment of changing customer behavior; - maintaining focus on verification of run-off assumptions and how banks apply LCR regulation in practice, particularly given fast-paced digital developments and changes to business models. - OJK receives granular data on run-off assumptions but needs more detailed analysis. ### Operational risk and IT/cyber - OJK has a regulation providing guidance and expectations for operational risk management requiring banks to identify, assess, evaluate, monitor, report, and control or mitigate operational risk. - OJK has established a team of IT risk specialists to support onsite examinations, strengthening capacity to perform deep-dive assessments of technology risks and information security (cyber). - Gap: - need for traditional operational risk specialists to support onsite processes and deepen coverage of non-IT operational risk. - Observations: - operational risk often a primary or secondary concern in RBBR outputs, driven by IT specialists; - coverage, frequency, and depth of non-IT operational risk assessments are weaknesses; - evidence suggests greater intensity is needed to demonstrate operational risk management frameworks (ORMF’s) are fully integrated into banks’ overall risk management. - Onsite examinations assess governance but may not focus on operational risks unless specified in supervisory action plans. ### Large exposures, concentration risk, and state-owned exposures - OJK has adopted the Basel standard on large exposure in regulation and receives periodic reports from banks on concentration risk and large exposure. - RCAP result on Large Exposure published in 2020 concluded Indonesia’s regulation on large exposure is compliant with the Basel standard. - Areas of attention: - aggregate exposures of state-owned banks to state-owned enterprises and government bonds are significant and require attention to total government exposure; - regulations are not specific in requiring a comprehensive bank-wide view of significant sources of concentration risk beyond credit risk; - off-balance sheet items and contingent liabilities are captured in offsite reporting; OJK collects detailed data on loans by economic sector, loan type, geography, and concentration in liabilities (top 50 deposits). ### Related party transactions - Material weaknesses in regulations and supervisory processes need to be addressed to mitigate risks from related party transactions. - Current measures: - enhanced requirements for related parties; - aggregate limit set at 10 percent of total capital; - OJK receives comprehensive information. - Remaining shortcomings: - expanding definitions, setting clear governance requirements, and enhancing supervision are needed; - consider a dedicated regulation to consolidate related party transaction requirements across different regulations; - state-owned banks’ transactions with state-owned enterprises should respect typical related party requirements. ### Country and transfer risk - Further effort needed to establish a more comprehensive supervision approach for country and transfer risk. - Current state: - country risk exposure of Indonesian banks is relatively limited due to domestic focus, though some banks have greater exposure; - OJK’s risk-based supervision has given country and transfer risk relatively minor consideration in recent examinations; - regulations and reporting requirements are not sufficiently specific to capture all dimensions of country and transfer risk, which are not explicitly included in offsite surveillance or onsite examinations. ### Interest Rate Risk in the Banking Book (IRRBB) - Regulatory framework provides a comprehensive bank-wide view of IRRBB. - Banks must develop policies/processes to identify, measure (including evaluation and validation of models), monitor (including reporting to management and mitigation actions), and control or mitigate material IRRBB sources and have information systems for risk management. - OJK’s approach: - OJK assesses that banks have IRRBB policies and mitigation strategies, reviewing strategy and policy frameworks mainly during onsite examinations; - market risk specialists support line supervisors when needed. - Context and supervisory focus: - IRRBB was a focus given steepening of the yield curve in 2022 continuing into 2023; - OJK examined ALCO role, quality of analysis and reporting, governance, and how committees respond to market conditions; - examples observed of OJK assessing internal control mechanisms over IRRBB using EVE measurement method and NII. - In 2022, the main prudential meeting (Bank's Business Plan and Prudential Meetings) featured IRRBB issues. ### Principle 29 — Abuse of financial services (AML/CFT) - Closer cooperation with the FIU and enhanced requirements for banks would strengthen OJK’s supervision of AML/CFT risk management. - Current interactions: - FIU and OJK cooperate and share information, but more regular and granular information sharing would better inform OJK’s risk assessment and onsite examination processes. - Regulatory recommendations: - mandate banks to establish a customer acceptance policy identifying business relationships the bank will not accept based on identified risks; - explicitly require banks to report suspicious activities of fraud when material to safety, soundness, or reputation. - Implementation status: - OJK is making efforts to implement FATF MER 2023 recommendations addressing shortcomings such as Customer Due Diligence and Ultimate Beneficial Owners. - Indonesia became a member of FATF as of October 25, 2023. *Source: IMF detailed assessment excerpts on OJK supervisory framework and regulatory implementation.* ### 2026. According to FSOL 2023, the OJK will issue new business licenses to cooperative ### 2026. According to FSOL 2023, the OJK will issue new business licenses to cooperative institutions within one year, following the Ministry’s assessment based on new criteria by the beginning of 2025. ### EC2: Primary objective of banking supervision - Principle: The primary objective of banking supervision is to promote the safety and soundness of banks and the banking system. If the banking supervisor is assigned broader responsibilities, these are subordinate to the primary objective and do not conflict with it. - Description and findings re EC2: - The previous FSAP recommendation on giving primacy to the objective of safeguarding financial stability has been partially addressed in the FSOL 2023. - FSOL 2023 states the objective of the OJK is, inter alia, to “actively maintain financial system stability.” - The primary legislation lacks a provision that OJK’s mandate is to promote safety and soundness of individual banks and the banking system (S&S mandate). - The broad safety and soundness mandate must also be effectively translated to the operational level, particularly in determining OJK’s risk tolerance. - The lack of clarity regarding of the S&S mandate leaves considerable room for interpretation, making it challenging to assess how effectively supervisors are delivering on their core mandate, including taking timely corrective and sanctioning measures. - The primary legislation has not established the hierarchy of OJK multiple objectives. OJK has broader mandated responsibilities, including consumer protection, development objectives, and an integrated regulator. - FSOL 2023 has introduced several new mandates for OJK, such as to perform regulatory and supervisory tasks on: - i) financial service activities in the derivatives finance, carbon stock exchange sectors; venture capital companies, microfinance institutions and other FSI; - ii) activities in the Financial Sector Technological Innovation (ITSK) as well as digital financial assets and crypto assets; - iii) the conducts of financial service business actors and the implementation of consumer education and protection; and - iv) financial sector in an integrated manner as well as conducting a systemic impact assessment of financial conglomerates; and, in addition, OJK was tasked with carrying out financial sector development, coordinating with relevant ministries/institutions and authorities. - FSOL 2023 has strengthened powers for banks’ recovery, mergers and acquisitions, investigation, etc. - The Indonesian Financial Services Sector Master Plan 2021-2025, approved by the OJK’s Board of Commissioners, aims to support national economy’s recovery program and enhance the financial sector’s resilience and competitiveness. - The Roadmap of Indonesian Banking Development 2020-2025 encompasses development directions including encouraging financing to the real sector, strengthening banking’s role in the national economy, and accelerating digital transformation. - Assessment: Banking supervisors should have S&S objective as their primary goal. Development and other goals should unequivocally be subordinated to this primary objective and do not conflict with it. - Footnotes reproduced from source: - "In this document, “risk profile” refers to the nature and scale of the risk exposures undertaken by a bank." - "In this document, “systemic importance” is determined by the size, interconnectedness, substitutability, global or cross-jurisdictional activity (if any), and complexity of the bank, as set out in the BCBS paper on Global systemically important banks: assessment methodology and the additional loss absorbency requirement, November 2011." ### EC3: Authority to set and enforce minimum prudential standards - Principle: Laws and regulations provide a framework for the supervisor to set and enforce minimum prudential standards for banks and banking groups. The supervisor has the power to increase the prudential requirements for individual banks and banking groups based on their risk profile and systemic importance. - Description and findings re EC3: - In accordance with Article 7 of OJK Law, OJK has full authority to conduct regulation and supervision of banks and banking groups. - OJK is empowered to issue legally binding prudential regulations in the form of Regulations and Circular Letters for banks and banking groups. - OJK holds the authority to enforce banks and banking groups to comply with its regulations. - OJK maintains the power to increase or to establish more stringent prudential requirements for individual banks and banking groups based on their risk profile and systemic importance. - OJK has imposed Pillar 2 add-ons based on the results of the supervisory review process. - The Basel framework for dealing with D-SIBS was implemented in 2015. - The implementation of these powers and frameworks is prescribed in CP 16. ### EC4: Updating laws, regulations and prudential standards - Principle: Banking laws, regulations and prudential standards are updated as necessary to ensure that they remain effective and relevant to changing industry and regulatory practices. These are subject to public consultation, as appropriate. - Description and findings re EC4: - OJK updates its prudential requirements for banks on a regular basis to ensure that they remain effective and relevant to changing the Basel framework. - As a G-20 and BCBS member country, Indonesia has committed to implementing the BCBS’s internationally agreed standards while making appropriate adjustments to reflect national interests. - The OJK places a high priority on the timely implementation of the Basel framework. Most regulations for implementing Basel III post crisis reforms have been issued in recent years. - Typically, regulations are reviewed when the BCBS reviews standards and principles on which the OJK regulatory framework endeavors to follow. - Example: OJK issued Circular Letter (2022) to implement Basel III Framework for market risk using standardized approach (this regulation will be effective on January 1, 2024). - In 2023, OJK is in the process of issuing regulation for margin requirements for non-centrally cleared derivatives and capital requirements for CCPs. - Indonesian regulations are less specific than the Basel framework. This approach results in simpler standards that are easier for many stakeholders to understand but may lack detailed guidance for banks, leaving room for interpretation. - Indonesia is increasingly shifting towards principle-based regulations to foster innovation. OJK expects that this approach will better adapt to changing circumstances, emerging risks, and evolving technologic advancements more effectively. - Regulations issued by the OJK (and BI) have never been challenged in court. - In January 2023, the authorities enacted a comprehensive or FSOL, that integrates 17 institutional and sector-specific laws, including the OJK Law and the Banking Law. However, it is worth mentioning that the Banking Law remained unchanged from 1998 to *Source: 1idnea2024004-print-pdf - 2026. According to FSOL 2023, the OJK will issue new business licenses to cooperative institutions within one year, following the Ministry’s assessment based on new criteria by the beginning of 2025.* ### 2023. Throughout, any international banking regulatory and supervisory developments ### 1idnea2024004-print-pdf - 2023. Throughout, any international banking regulatory and supervisory developments ### Scope of supervisory powers (EC5–EC7) - EC5: Supervisor powers - (a) full access to banks’ and banking groups’ Boards, management, staff and records to review compliance with internal rules and limits as well as external laws and regulations (Article 30 of Banking Law). - (b) review overall activities of a banking group, both domestic and cross-border (Article 29 of Banking Law). - (c) supervise the activities of foreign banks incorporated in its jurisdiction (Article 29 of Banking Law). - EC6: Remedial and sanctioning powers - OJK authority to impose sanctions per Article 52 of the Banking Law: fines; prohibition from taking part in clearing activities; freezing certain business activities; dismissal of management and appointment of temporary substitute management; degradation of bank’s soundness rating; inclusion of persons in a list of disreputable (disgraceful) persons. - OJK authority to revoke a bank’s business license (Article 9 of the OJK Law). - OJK may cooperate with domestic authorities such as BI and LPS to achieve an orderly resolution, including triggering resolution. - EC7: Consolidated/group supervision - Pursuant to Article 29 of Banking Law (No. 7 of 1992 as lastly amended by FSOL 2023), OJK supervises related parties in banking groups on a solo and consolidated basis, including parent companies, material affiliates, and holding companies, assessing contagion risk. ### High-level assessment of institutional mandate and legal framework (Principle 1) - Assessment: Largely Compliant. - Key findings: - OJK is responsible for microprudential supervision; responsibilities and objectives are defined in OJK Law and Banking Law and publicly disclosed. - Laws provide legal powers for licensing, ongoing supervision, corrective and sanctioning actions. - OJK supervises both solo and consolidated, and has imposed Pillar 2 add-ons and implemented Basel D-SIBs framework in 2015. - Shortcomings noted: - Primary legislation lacks a clear definition of OJK’s mandate to promote safety and soundness of individual banks and the banking system (S&S mandate). - No established hierarchy of OJK multiple objectives; development and credit growth objectives may not be subordinated to S&S mandate. - Shift toward principle-based regulation; Banking Law is principle-based and minimum prudential standards are in secondary legislation. - Banking Law was not updated from 1998 to 2023. ### Independence, accountability, resourcing, and legal protection (Principle 2) - Assessment: Materially Non-Compliant. - EC1–EC4 governance and independence issues: - OJK Law (Article 2) declares OJK independent, but contains provisions that may compromise operational independence. - Ex-officio BoC member (typically Vice Minister of Finance) appointed on Minister of Finance recommendation and holds voting rights; Article 10 does not clearly define role or reporting, raising potential political interference and conflict of interest for state-owned banks. - FSOL 2023 integrates OJK budget into State Budget starting 2024 while preserving several safeguards (levies deposited to OJK account; levies usable in following fiscal year; OJK budget discussed with House of Representatives and submitted to Ministry of Finance). The law does not explicitly state the Ministry of Finance has no control over OJK budget. - FSOL 2023 establishes an OJK Supervisory Board (composition not specified) with Government officials potentially represented; concerns about micromanagement and budgetary/resource impact. - EC2 appointment/removal and tenure: - BoC members appointed via Selection Committee and House of Representatives; BoC terms are five years with reappointment for one term; Article 335 FSOL 2023 set six-year terms for Chairperson and the member in charge of consumer education and protection for 2022–2027; BoC increased from 9 to 11 members. - Members cannot be dismissed except for reasons in Article 17; requirement to disclose removal reasons not explicitly provided in primary legislation. - EC5–EC6 credibility, resources, and legal protection: - Ethics Code (10/PDK.02/2013) and confidentiality provisions (Article 33 OJK Law) exist. - Budget funded by levies from regulated financial institutions since 2016; FSOL 2023 allows State Budget support if levies inadequate. - Need for significantly larger budget for FSOL 2023 mandates and enhanced supervision; OJK faces talent recruitment challenges for risk specialists and lacks differentiation system for departments by responsibility. - OJK has not used its authority to engage external experts (although authorized). - Legal protection introduced in 2023 (Article 45A FSOL 2023): Chairperson, Vice Chairperson, BoC members, officials and employees cannot be prosecuted civilly or criminally if acting in good faith and per law; law does not explicitly guarantee coverage of legal defense costs—BoC Regulation 17/PDK.02/2014 provides legal aid mechanisms and financing but needs update to reference FSOL 2023 and include all 11 BoC members. ### Cooperation and information sharing (Principle 3) - Assessment: Largely Compliant. - EC1 domestic cooperation: - OJK Law Articles 39–46 grant powers to cooperate with BI and LPS; MoUs: BI (2013), LPS (2020 updated), FIU (2019). - KSSK (Article 44 OJK Law) chaired by Minister of Finance coordinates financial stability and crisis management; OJK, BI, LPS designate list of domestic systemically important banks every 6 months for submission to KSSK. - Evidence that domestic arrangements work in practice; BI and LPS now submit prior notifications to OJK when they conduct on-site exams. - EC2–EC4 cross-border cooperation and confidentiality: - Article 47 OJK Law authorizes cross-border cooperation; MoUs exist with nine foreign supervisory authorities and exchange of letters with Japan Financial Services Agency and Taiwan’s Financial Supervisory Commission; in process negotiating with MAS. - MoUs contain confidentiality clauses; Article 33 OJK Law imposes general confidentiality obligations. - Observable evidence that arrangements work in practice, but formal arrangements are absent with some foreign supervisors despite material cross-border operations—this can hinder supervision and transmission of confidential information. - EC5 resolution support: - FSOL 2023 assigns exclusive resolution authority to LPS; OJK supports LPS: grants bridge bank operating license, approves Bridge Bank BoC and BoD members, approves P&A transfers, facilitates TEP, and revokes business licenses in liquidation. - OJK assesses and approves recovery plans and shares information with LPS; processes in place to support resolution planning. ### Permissible activities, use of “bank” and deposit-taking (Principle 4) - Assessment: Compliant. - Definitions and restrictions: - Banking Law Article 1(2) defines “bank” and OJK Regulation No.12/POJK.03/2021 applies. - Articles 6–7 Banking Law and 12/POJK.03/2021 define permissible activities; Article 10 prohibits direct investment outside financial institutions and insurance business; FSOL 2023 allows acquisition of non-financial companies that support banking (e.g., IT companies). - Use of “bank” restricted to licensed institutions; Article 21 and 22 of 12/POJK.03/2021 and administrative sanctions apply. - Deposit-taking reserved to banks with OJK license (Article 16 Banking Law); criminal enforcement role for OJK expanded under FSOL 2023 (Article 48B). - Cooperatives that collect deposits will be licensed, regulated, and supervised by OJK under FSOL 2023 (Cooperatives Law amendment). - Publication of licensed banks: - List published on OJK website; latest update noted as June 14, 2023. A license change for Prima Master Bank (January 2023) was not updated on website for eight months; list placement under ‘Banking/Data and Statistics’ may not be immediately clear as a list of licensed banks. ### Licensing framework and criteria (Principle 5) - Assessment: Largely Compliant. - EC1–EC3 licensing authority, criteria, and consistency with supervision: - OJK has authority to grant and revoke banking licenses (Article 7 OJK Law); OJK Regulation 12/POJK.03/2021 sets licensing criteria consistent with ongoing supervision: good track record, sound financials, fit and proper shareholders/BoC/BoD, business strategy, risk management and controls. - No prudential conditions imposed on new banks due to CEPA commitments. - No new bank license applications in past five years. - EC4–EC6 structures and minimum capital: - OJK assesses legal, managerial, operational and ownership structures; typically requires home supervisor confirmation for foreign applicants. - Lacks explicit authority to reject an application solely because proposed structures hinder supervision or corrective measures; in practice issues are raised and must be resolved before license issuance, which can prolong process. - Minimum initial capital to establish a new bank: IDR 10 trillion (US$645 million) (Article 12 12/POJK.03/2021). - Transitional/regulatory capital requirements: banks required Tier 1 IDR 3 trillion (US$190 million) by December 31, 2022; regional state-owned banks required to meet Tier 1 IDR 3 trillion (US$190 million) by December 31, 2024. Prima Master Bank had license changed to rural bank license January 2023 due to capital shortfall. - EC7–EC11 fit and proper, plans, financial projections: - Fit and proper assessments required for BoC and BoD (No.12/POJK.03/2021 and No.27/POJK.03/2016); criteria include integrity, competence, financial reputation; room to strengthen criteria to explicitly require skills commensurate with size/complexity, conflict-of-interest assessment, collective BoC knowledge, and independence of mind. - Applicants submit strategic/operating plans, corporate governance, risk management, IT systems, and pro forma financials including sensitivity analyses; OJK requires proportionality. - Home supervisor confirmation and assessment of consolidated supervision practiced for foreign entrants. - OJK monitors new entrants under its risk-based supervision framework; OJK does not impose additional prudential conditions on new banks. ### Control of significant ownership changes (Principle 6) - Assessment: Largely Compliant. - EC1 definitions: - ‘Controlling shareholder’ defined in OJK regulations as owning ≥ 25 percent of shares and voting rights, including parties acting in concert; also includes parties owning < 25 percent if proven to exercise control (27/POJK.03/2016). ‘Control’ defined as actions to influence management/policies regardless of ownership percentage. - No separate explicit definition of ‘significant ownership’; beneficial ownership not explicitly mentioned in definition though ultimate shareholders are considered under discretion of OJK. - EC2–EC6 notification and approval regime: - Prior approval required for transfers that change control or exceed 25 percent threshold; any transfer above 5 percent must be reported to OJK within 10 days. - Over past five years OJK received 21 requests related to share ownership transfers (16 conventional, 5 sharia banks). Prior approvals used in practice. - OJK can reject changes in control that hinder supervision (Article 30(4) 27/POJK.03/2016) and prospective controlling shareholders must satisfy integrity/financial eligibility. - OJK collects beneficial ownership information for local banks and certain foreign banks; obtaining ultimate beneficial owner information from some large foreign banks is challenging; OJK engages home supervisors where necessary. - No cases in past five years where OJK exercised powers to modify/reverse unauthorized changes of control; clarification needed on application of such powers. - No explicit regulatory requirement for banks to notify OJK of material information negatively affecting suitability of major shareholders, although governance regulations require Board reporting of violations and circumstances jeopardizing business continuity; Article 41 of 12/POJK.03/2021 requires banks to inform OJK about changes in shareholder composition. ### Major acquisitions and equity participation (Principle 7) - Assessment: Compliant. - EC1–EC5 framework and practice: - Long-term equity participation in financial institutions treated as ‘major acquisition’; OJK Regulation 22/POJK.03/2022 requires prior approval for equity participation and limits total equity participation to not exceed 35 percent of bank capital. - Exemptions: temporary investment (less than 5 years) in non-financial defaulting debtor companies can occur without prior approval. - Criteria for approval include capital adequacy, inclusion in business plan, RBBR of PK-1 or PK-2 in last two years, not disrupting business continuity, written policies and effective internal controls. - OJK assesses due diligence, financial/managerial/organizational resources, contagion and resolvability risks, and may require divestment or revoke approval if equity participation worsens capital or risk profile or hinders supervision or resolution. - Since 2018 numerous applications received, mainly local larger banks acquiring smaller banks; no foreign acquisition applications since 2018. - OJK presents compliance assessment results in annexes to approval decisions though not clearly articulated in main approval text. ### Supervisory approach and risk-based supervision (Principle 8) - EC1 methodology and resource allocation: - OJK uses a risk-based supervision framework per BoC Regulation 1/PDK.03/2018, employing a six-step risk-based supervisory cycle to determine nature, impact and scope of risks across banks and banking groups, including group structure, business focus, internal controls and resolvability; frequency and intensity of supervision reflect these assessments. - Risk-based tools include RBBR (bank soundness rating) as primary resource allocation tool; D-SIBs framework requires more intensive supervision (e.g., number of supervisors for largest banks increased to 10). *Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1idnea2024004-print-pdf.pdf* ### 1. Know your Bank ### 1. Know your Bank ### Methodology overview - The methodology for ‘Know Your Bank’ require to establish the bank’s institutional profile by accounting for internal factors such as: - the ownership structure of the bank; the banking group structure; the BoC and BoD, the management; key business lines; key supporting activities; business plan (vision, mission, strategy, etc.); risk profile and financial performance; organization structure, risk management, and internal control; - and external factors such as economic outlook and industry outlook (peer group analysis). - OJK has been consistently collecting an extensive range of information from various sources, including from the bank, in a well-structured manner. ### Risk Profile and Bank Soundness Level (RBBR) - The methodology for ‘Risk profile and Bank Soundness level’ refers to the bank’s RBBR, which has four major components and integrates them into one overall assessment consisting of: - (i) risk profile; (ii) corporate governance; (iii) earning; and (iv) capital. - The risk profile is an assessment of the bank’s inherent credit, liquidity, market, operational, legal, strategic, reputational and compliance risks in order to present a more robust assessment of a bank's risk profile and soundness level. - Currently, the methodology requires that supervisors, in assessing RBBR, include consideration on emerging risks, cybersecurity, and climate-related risks, among others, into the eight existing risk categories. - In practice, there are vulnerabilities to adequately discriminate riskiness. ### Supervisory plan - The methodology requires that OJK develops the supervisory plan based on the bank’s risk profile and soundness level assessment. - The supervisory plan should: - identify significant risks—both current and potential—and issues of supervisory concern, as well as changing market conditions and emerging risks; - outline annual supervisory activities and incorporate the selected regulatory tools to implement the plan, which depends on the overall rating of the bank. - In practice, the plan includes both off-site and on-site supervision engagements. ### Examination - The methodology highlights that on-site examinations should be conducted at least once a year and may be full scope or targeted (focused on a specific product, functional area or risk). - The examination should adopt a more risk-based approach, focusing on the areas of highest risk and potential vulnerabilities, in which supervisors shall conduct a comprehensive assessment of the bank's risk management practices, internal controls, and governance frameworks. - In practice, OJK’s on-site examinations of the effectiveness of corporate governance and risk management frameworks and practices are limited. ### Updating risk profile and bank soundness level - The methodology requires that based on the updated information and analysis including on-site examination results, the bank's risk profile and soundness level are reassessed to determine: - the adequacy of the bank's risk management practices, - its ability to withstand potential risks and shocks, - and its overall financial soundness. - It was envisaged that this approach can help to identify areas of concern or weakness that may require corrective actions or additional supervision. - Yet, OJK could further enhance its assessment by conducting a more thorough analysis on the corporate governance and risk management (see finding of CP 14 and CP 15) by considering current development and emerging risks, and evidence-based approach. ### Key findings and opportunities - The current application of the RBBR and its associated methodology presents certain challenges but also signifies opportunity for significant enhancements. - Adopting a more evidence-based approach to risk assessment and rating can: - ensure that the rating system not only meets the regulatory objectives but also becomes a more accurate and useful tool for assessing the risk profiles of banks and promoting financial soundness; - make the rating system a powerful instrument for ensuring the stability and resilience of the banking sector after the right adjustments and improvements. *Source: 1idnea2024004-print-pdf - 1. Know your Bank* ### 6. Supervision Monitoring and Measures ### 6. Supervision Monitoring and Measures ### Supervisory communication and corrective actions - Supervisors are required to regularly communicate with banks in a timely and transparent manner, providing clear feedback and guidance based on examination findings and risk assessments (RBBR). - Banks are encouraged to promptly address identified weaknesses and implement necessary corrective actions. - Supervisors monitor corrective actions by establishing clear timelines for implementation and conducting follow-up discussions/meetings. ### Risk-based bank rating (RBBR) methodology — findings and limitations - Assessors found OJK’s risk-based supervisory framework (methodology), based on RBBR, is well structured, incorporates the key banking risks, and allows analysis of inherent risk, related risk management processes, corporate governance, earnings, and capital. - The supervisory approach uses a six-point cycle beginning with the “know your bank” phase, provides for ongoing supervision through off-site monitoring (designed to detect risks between supervisory engagements such as annual on-site examinations and semi-annual risk assessments), and allows flexibility for supervisory professional judgement. - OJK has been consistently collecting an extensive range of information; quantitative analysis is well developed. - OJK is in transition to implement a recovery framework for all banks. Limitations identified: - 105 banks’ ratings are concentrated in only the middle 2 ratings out of 5 possible ratings on a scale, which may indicate: - The rating system fails to provide necessary granularity to distinguish between different banks. - The need for more thorough analysis on corporate governance and risk management (see findings of CP 14 and CP 15) by considering current developments, emerging risks, and an evidence-based approach. - Risk of bank complacency if banks receive consistently high ratings. - Potential pressure on supervisors to rate in a certain way. - Recommendation: revise the methodology and its application to make it more risk sensitive, adequately discriminate riskiness and base it on sufficient evidence. ### Systemic banks (D-SIBs) and supervisory intensity - The Basel framework for dealing with D-SIBS was implemented in 2015 (there were 13 D-SIBs at the time of the mission). - More resources were allocated for these banks (for example, the number of supervisors for the largest banks was increased to 10). - While supervisory engagements for all banks are intensive (e.g., semi-annual risk assessments, annual on-site examinations), the risk methodology needs enhancement to further differentiate supervisory intensity for D-SIBS (off-site supervision activities, on-site examinations, and prudential meetings). - Recommendation: OJK should consider transitioning from semi-annual to annual rating assessments because semi-annual rating assessments are described as too heavy and burdensome, diverting resources from more productive supervisory activities. ### EC2 — Forward-looking risk profiling and supervisory processes - OJK supervisors have a clear process for the risk-based supervision cycle to conduct semiannual assessments of banks’ ‘Soundness’ and determine banks’ RBBR. - Supervision of banks and banking groups is undertaken by supervisory teams responsible for their portfolio; supervisors use RBBR to identify and assess key risks (risk profile and risk management), corporate governance, earnings, and capital. - For banking groups, OJK conducts supervision on a consolidated basis. - The risk methodology includes an assessment of strategic risk (Risk profile rating) and annual prudential meetings with banks’ BoC and BoD to discuss business plans. - Banks’ ICAAP provides OJK with useful forward-looking information; OJK requires periodic stress testing and ICAAP inclusion, where there is scope for improvement. ### EC3 — Compliance with prudential regulations - Supervisors assess compliance through off-site supervision (verification of regulatory returns), on-site examinations, and review of internal and external audit reports. - Banks’ Compliance Directors regularly report non-compliance issues to OJK. - Supervisors follow up with banks to ensure prompt corrective actions to rectify weaknesses and institute adequate controls to prevent recurrence. - Gap: no formal program to systematically verify supervisory information (quality and integrity of reporting discussed under CP 10). - On-site inspections are essential to identify non-compliance and unsafe and unsound practices early. ### EC4 — Macroeconomic and cross-sectoral considerations - In semi-annual assessments of banks’ ‘Soundness’, supervisors consider external factors such as changes in interest rate, inflation rate, foreign exchange rate, commodity price fluctuations, technology developments, and new regulation. - Supervisors use OJK’s “Financial Sector Development” and “Banking Industry Assessment” and information from cross-sectoral coordination within OJK (Banks, Non-Bank Financial Institutions, Capital Market, Fintech, and other financial entities) and coordination with other domestic authorities (KSSK, BI, and LPS). - External factors are primarily considered in assessing strategic risk and are included in the “Know Your Bank” section. ### EC5 — System-wide risk monitoring and coordination - OJK performs microprudential supervision and coordinates with Ministry of Finance, BI, and Lembaga Penjamin Simpan (LPS) through: - KSSK Periodical Meeting between OJK, Ministry of Finance, BI, and LPS: Principal Level and Deputies Level - Macroprudential and Microprudential Forum between OJK and BI: high level, technical level, Head of Departments level - Macroprudential, Microprudential, and Resolution Forum between OJK, BI, and LPS: high level, technical level, Head of Department level - In these forums, OJK communicates banks’ financial conditions, problem assets, liquidity, capital, supervisory concerns, and significant trends or emerging risks; other authorities provide macroprudential, resolution and LPS perspectives. - OJK incorporates this analysis into assessments and regularly engages with banks via prudential meetings to communicate buildups of risks or emerging trends and may require necessary measures. ### EC6 — Resolvability assessments and coordination with resolution authority - The Resolvability test for the Bank Resolution Plan is conducted by LPS, the resolution authority; LPS communicates findings to OJK. - Resolvability assessments have involved all banks presenting a resolution plan. - Under FSOL 2023 changes, LPS “may” prepare resolvability assessments against approved resolution plans. - LPS has identified operational continuity as crucial and has asked banks to identify critical contracts, shared services, and vendors and to add resolution clauses; identified impediments will lead LPS, after coordinating with OJK, to request remedial actions in writing, expected to be resolved within an informal cooperative process. ### EC7 — Framework for handling banks in stress - Recovery planning framework implemented for D-SIBs; OJK BoC Regulation 1/PDK.01/2018 concerning Crisis Management Protocol provides a legal basis for decision-making in prevention/management of abnormal conditions. - OJK Regulation No. 15/POJK.03/2017 requires any bank (not only D-SIBs) to deliver a recovery plan when supervisor raises concerns that may harm operations and soundness. - Recovery plans may include capital injections, improvements in risk management up to BoD and BoC level, and opening communication with home supervisors. - Banks’ recovery plans can be activated in times of stress; OJK can request banks to implement recovery plans. - With FSOL 2023, recovery and resolution plans are required for all banks. - OJK has an MoU with LPS regarding bank resolution; OJK can trigger resolution but hands it over to LPS. ### EC8 — Bank-like activities outside the regulatory perimeter - Authorities act when entities conduct banking business without a license; FSOL 2023 expands OJK enforcement powers regarding criminal acts in financial services (Article 48B, Article 49). - OJK has authority to conduct preliminary investigations and determine commencement, non-commencement, or termination of investigations into criminal acts in financial services; OJK coordinates with the Indonesian National Police. - OJK is an integrated supervisor across banks, capital market, insurance, and other non-bank financial institutions, reducing regulatory gaps and opportunities for regulatory arbitrage. - Measures to mitigate bank-like activities outside the perimeter include the Investment Awareness Task Force (Satuan Tugas Waspada Investasi/SWI) and regulatory treatment of similar activities/risks equivalently. ### Assessment of Principle 8 — Summary and recommendations - Assessment: Largely Compliant - Comments and key recommendations: - OJK’s risk methodology framework is well structured and permits analysis of risk, risk management, corporate governance, earnings, and capital, with a six-point supervisory cycle and ongoing off-site monitoring. - Shortcomings: concentration of 105 banks’ ratings in the middle two of five ratings indicates need to enhance risk sensitivity and discriminatory power of the rating framework. - Need to further differentiate supervisory intensity for D-SIBS beyond resource allocation. - OJK should consider moving from semiannual to annual rating assessments to reduce burden on supervisory resources. - Gaps stem from corporate governance and risk management assessment areas; rating framework relies significantly on supervisors’ professional judgement. OJK should conduct more thorough and evidence-based analysis of corporate governance and risk management (addressed in CP 14 and CP 15). ### Principle 9 — Supervisory techniques and tools (EC1–EC5) — findings - EC1 (mix of on-site and off-site supervision): - OJK’s risk-based approach involves both on-site and off-site supervision determined by the ‘Know Your Bank’ and RBBR assessments. - On-site and off-site scope depends on bank risk and soundness levels, with focus on highest risk areas (credit risk, liquidity risk, operational risk or IRRBB). - On-site examinations should be conducted at least once a year and may be full scope or targeted; recently, OJK mainly conducted targeted on-site examinations focusing on highest risks. - In practice, on-site examinations of corporate governance and risk management effectiveness are limited; supervisors use sampling for transaction testing and need a more holistic portfolio-level risk view. - Specialist supervisors carry out off-site reviews and participate in on-site reviews; OJK could expand specialist areas (accounting) and increase the number of risk specialists including credit risk and operational risk (non-IT). - There is a dedicated division (100 people) responsible for developing and enhancing supervisory methodologies and promoting consistency across Banking Supervision Departments. - Need to update supervisory model to integrate developments since 2011 (D-SIBs, Basel Pillar 2, Recovery framework, stress testing, business model sustainability analysis) and rebalance supervisory activities with more horizontal reviews and holistic assessments. - EC2 (planning and execution coherence): - Planning and implementation are prescribed in OJK internal regulations and circular letters, involving steps: 1) Know Your Bank; 2) Risk Profile and Bank Soundness Level; 3) Annual Supervisory Plan; 4) Annual On-site Examinations; 5) Off-site Supervision and Measures. - OJK implements a continuous risk-based supervisory cycle that synergies off-site and on-site supervision; supervisors develop a one-year supervisory plan and monitor implementation quarterly. - Supervisory teams are responsible for both on-site and off-site supervision for their bank portfolios; specialists support thematic areas. - EC3 (information sources and reliability): - Supervisors use periodic reports (daily, weekly, monthly, quarterly, biannually, annually through LBUT), ad-hoc reports, macro surveillance, media, home-host supervisor exchanges, information from OJK structural units, other domestic authorities (Ministry of Finance, LPS, BI), and external audit results. - Reporting system includes structured reporting (LBUT) and unstructured reporting (APOLO and OBOX); regulatory returns are subject to data validation checks versus past trends and peers. - During on-site supervision, supervisors review banks’ information systems and reporting processes only for areas included in the supervisory plan. - OJK undertakes a holistic semi-annual assessment of bank risk profile with quantitative and qualitative inputs including ICAAP, self-assessments, related parties list, internal compliance, fraud strategy implementation, etc. - Supervisory tools: Integrated Bank Reporting System (LBUT), SupTech tools SIP (Banks Information System), and OSIDA (OJK SupTech Integrated Data Analytics); OSIDA helps find indications of problems in credit activities and third-party funds. - External auditors must highlight weaknesses in regulatory reporting. - EC4 (variety of analytical tools and communication): - Supervisors use SIP and OSIDA for data analytics, compliance checking, anomaly detection, and early warning. - Financial statement analysis is performed quarterly and annually; business model analysis is done during KYB drafting, covering Ownership and Structure of Business Group, Key Business activities, Key Supporting Activities, Business Plan and Financial Performance and Condition. - Strategic risk is assessed in RBBR but OJK lacks a clear methodology for assessing sustainability of banks’ business models and incorporating results into Soundness rating or supervisory review process. - Peer group analysis is used for consistency; supervisors require banks to conduct Bottom-Up Stress Testing (BUST) with baseline and severe scenarios per OJK guidelines (SEDK Number 16 /SEDK.03/2017) and OJK conducts Top-Down Stress Tests (TDST) and TDST at least once a year (guidelines in OJK SEDK Number 6/SEDK.03/2022). - Supervisors should challenge banks more on stress testing assumptions and data quality and develop a methodology for business model sustainability analysis. - Communication of findings occurs via prudential meetings and supervisory letters; a more structural and formal approach is needed to communicate Supervisory Review and Evaluation Process (ICAAP/SREP) results to banks. - EC5 (identifying and mitigating emerging system-wide risks): - OJK closely coordinates with Ministry of Finance, BI, and LPS to identify, assess, and mitigate emerging risks across banks and the banking system, including supervisory stress tests (individual and system-wide). - Joint Stress Testing: OJK and BI regularly conduct Joint Stress Testing every year; OJK coordinates BUST while BI conducts TDST. OJK also conducts TDST on all banks using its scenarios and models. *Source: 6. Supervision Monitoring and Measures (chapter text).* ### 1. KSSK Periodical Meeting between OJK, Ministry of Finance, BI, and LPS: Principal Level ### 1. KSSK Periodical Meeting between OJK, Ministry of Finance, BI, and LPS: Principal Level and Deputies Level ### Meeting scope and composition - Periodical KSSK meeting involving OJK, Ministry of Finance, BI, and LPS. - Participation levels specified: Principal Level and Deputies Level. ### Purpose and functions - Coordination forum for macroprudential and financial stability policies among the four institutions. - Platform for information exchange and joint assessment at senior and deputy leadership levels. --- ### 2. Macroprudential and Microprudential Policy Forum between OJK and BI: High level meeting, Head of Department level, and Technical Level ### Meeting scope and composition - Macroprudential and microprudential policy forum between OJK and BI. - Participation levels specified: High level meeting, Head of Department level, and Technical Level. ### Purpose and functions - Joint forum to discuss and align macroprudential and microprudential policy measures. - Multi-tiered engagement to ensure policy coherence from strategic (High level) to operational (Technical Level). *Source: 1idnea2024004-print-pdf - 1. KSSK Periodical Meeting between OJK, Ministry of Finance, BI, and LPS: Principal Level* ### 3. Macroprudential, Microprudential, and Resolution Policy Forum between OJK, BI, and ### 3. Macroprudential, Microprudential, and Resolution Policy Forum between OJK, BI, and LPS ### Supervisory communication, meetings, and escalation (EC6–EC10) - OJK engages in High level meeting, Head of Department level, and Technical Level trilateral meetings with BI and LPS. - OJK publishes quarterly Banking Industry Profile Report and monthly Financial Stability Review to inform public and stakeholders. - Supervisory communications to banks are delivered via prudential meetings, supervisory letters, keynote speeches, direct communications, emails, phone, meetings, and formal letters. - Internal audit interaction: - Supervisors assess internal audit independence, authority, methodology, coverage, quality of audit reports, and follow up. - Banks must submit a special report signed by the President Director and Chairman of the Audit Committee regarding any internal audit findings that are significant and potentially threaten continuity no later than three working days after discovery. - Board and management engagement: - Annual prudential meeting to discuss business plan, performance, strategy; OJK can request revisions if plans are not feasible. - Semi-annual meetings with BoC and BoD to discuss bank rating; annual meetings to deliberate BoC report, corporate governance report, self-assessment, and on-site examination findings. - OJK does not have a practice to meet separately with banks’ independent BoC members — identified need for separate meetings. - Follow-up and escalation: - Supervisors monitor follow-up strategies and remedial actions from on-site and off-site supervision; completion affects bank performance. - If action plans are unmet, BoD, BoC and controlling shareholders may be sanctioned according to prevailing regulation. - Supervisors may send letters regarding audit findings that require more time to be addressed. ### Supervisory information systems and data analytics (EC12; Principle 10) - Systems and tools used: - SIP — provides individual and consolidated financial information and risk based supervision results; generates Bank Performance Ratio (BPeR) monthly; peer group assessments by ownership and asset size. - OSIDA — SupTech focusing on data analytics for compliance checking, anomalies detection, early warning, allowing follow up on alerts and early intervention. - APOLO — used in data processing workflow. - Reporting frequencies required by law (Banking Law No.10 of 1998 as lastly amended by article 34 Law Number 4 of 2023- FSOL): - Daily; weekly; monthly; quarterly; six-monthly; and annually on a solo and consolidated basis. - Monthly reporting content includes: financial statements; prime lending rate; credit restructuring; credit write-off; risk weighted assets and capital adequacy; liquidity coverage ratio and net stable funding ratio; large exposures; related party transactions; activities as custodian bank; branch information; debtor information; and more. - Quarterly analysis includes complete balance sheet and profit and loss data, risk information, and reporting against business plan. - Semi-annual holistic risk assessment inputs: ICAAP, self-assessments, list of related parties, internal compliance, fraud strategy implementation, corporate governance self-assessment, recovery plan and update, sustainable finance report, external audit report, IT development plan, outsourcing, branchless banking, AML/CFT implementation, financial literacy and inclusion. - Data validation and verification: - Automated in-built checks detect anomalies; department verifies with banks and supervisors follow up. - On-site verification includes extracting data from core banking systems and reconciling with supervisory returns; this is not programmatic across all banks. - No formal periodic programmatic verification of supervisory returns by OJK or external experts (example: periodic verification of RWA’s, LCR is required on a periodic basis but not systematic). - Assessment of Principle 10: Largely Compliant. - Deviations noted: valuation framework verification (EC3), need for programmatic periodic verification of supervisory returns (EC9/EC12), and limited power to request information from non-financial unregulated entities within a wider group (EC6 — recent FSOL provisions not tested). ### Use of third parties and external experts (EC11, EC10, EC11) - Legal powers: - Banking Law allows OJK to appoint a Public Accountant for and on behalf of OJK to examine a bank. - Article 9 of OJK Regulation No. 41/POJK.03/2017 permits assignment of another party to carry out bank examination pursuant to work order and ToR set by OJK. - Practice: - OJK has had no practice using third parties to conduct supervisory activities; on-site examinations are primarily conducted by supervisors and risk specialists. - External experts’ work remains OJK responsibility for follow-up. - Public Accountants and Public Accountant Offices 'must' submit incidental reports to OJK, including significant violations (Article 36 of POJK 9 of 2023). ### Corrective and sanctioning powers (Principle 11; EC1–EC7) - Communication and remediation: - Supervisors raise concerns early via prudential meetings and supervisory letters; minutes are provided; inspection reports detail findings with corrective action plans and require regular status updates. - Supervisory action plans (SAPs) are tracked automatically; regular meetings track progress. - Range of supervisory tools and sanctions: - Tools used include written warnings, fine sanctions, suspensions of business, dismissal of bank’s director, downgrading bank soundness rating, prohibition from clearing, limitations on activities, and fit & proper re-tests. - Administrative sanctions per Article 52 of the Banking Act include: Fine sanction; Written reprimands; Downgrading the health level of a bank; Prohibition from participating in clearing activities; Suspension of certain business activities; Dismissal of bank executives and appointment of temporary replacements. - Most frequently used sanctions over past 5 years: financial penalties (fines), written reprimands, and recording negative remarks for integrity issues. - OJK may conduct fit & proper reassessments; resulting removals lead to internal disqualified person lists. - Early intervention and remedial measures: - OJK can require corrective measures at any time and act to prevent breaches of prudential thresholds. - OJK can impose higher minimum capital or LCR for a bank when assessed necessary (Article 2 paragraph (4) of POJK No. 11/POJK.03/2016; Article 2 paragraph (5) of POJK No. 42/POJK.03/2015). - Downgrading composite soundness rating is seldom used in practice despite availability. - Ring-fencing and intragroup contagion: - OJK has powers to issue written orders, appoint statutory manager, impose sanctions, and revoke/issue licenses (Article 9 OJK Law; Article 52 Banking Law). - Legal Lending Limit (LLL) limits intragroup exposures to 10 percent but does not provide explicit ring-fencing power; assessors recommend OJK have more explicit ring-fencing power for financial conglomerates. - Resolution cooperation: - OJK requires Recovery Plans for systemic banks (POJK No. 14/POJK.03/2017); OJK approves and monitors recovery plan implementation and triggers resolution & handling over to LPS when needed. - OJK supports resolution modalities: Bridge Bank (licensing, board approval, capital provision policy), Purchase and Assumption (approve transfer of good assets), Temporary Equity Participation, Liquidation (revocation of business license). - LPS (Law Number 24 of 2004 as amended) has exclusive authority for bank resolution; OJK coordinates trilaterally with BI and LPS. - Assessment of Principle 11: Largely Compliant. - Comment: OJK has broad powers but lacks explicit ring-fencing power and onsite examinations have not systematically sanctioned repeated breaches (case-by-case approach common). ### Consolidated supervision (Principle 12; EC1–EC7) - Banking group structure and concentration: - Financial conglomerates account for 88 percent of banking sector assets and almost 70 percent of financial system assets. - Majority have horizontal structure with non-regulated holding companies; some large groups are vertical with bank-led ownership of insurance, finance or securities entities. - Legal and regulatory framework: - OJK Regulation No. 38/POJK.03/2017 requires consolidated risk management for banks controlling subsidiaries: consolidated information/reporting systems, consolidated asset quality assessment, compliance with legal lending limit, consolidated risk profile and soundness assessment. - Financial conglomerates must have minimum capital at least 100 percent of minimum aggregate regulatory capital requirements (Article 2 of OJK Regulation No.26/POJK.03/2015). - Building block approach applied to calculate minimum capital of a financial conglomerate. - Reporting and supervisory inputs: - Six-monthly list of regulated entities in group required (shareholding, ownership, directors, activities). - Quarterly consolidated financial statements and intragroup exposures reported. - OJK can restructure banking activities under an intermediate holding in complex group cases. - Limitations and FSOL: - OJK does not currently have power to require reporting on non-financial and unregulated entities within broader group; FSOL includes additional powers (Article 36A of the FSOL) to collect information from any party which OJK assesses has influence over the bank (not tested during mission). - To mitigate, OJK examines intra-group exposures during on-site inspections; but build-up of risks between on-sites could be unmonitored. - Assessment of Principle 12: Largely Compliant. - Comment: Consolidated supervision robust for regulated entities; limitations remain regarding non-financial/unregulated entities which FSOL aims to strengthen. ### Home-host cooperation for cross-border supervision and crisis management (Principle 13; EC1–EC10) - Scale of cross-border operations: - Cross-border operations of Indonesian banks typically not material (significance measured in assets/revenue is no greater than 5 percent). - OJK has not organized bank-specific supervisory colleges as home supervisor but participates as host supervisor in multiple colleges. - Memoranda of Understanding (MoUs) and bilateral arrangements: - OJK has established 9 MoUs or exchange letters with foreign supervisory authorities (examples listed in source). - Negotiations ongoing with MAS; limited or no formal arrangements with some European authorities where no material cross-border operations exist. - Cross-border supervisory practice: - OJK conducted 13 cross-border examinations in 2022. - OJK cooperates on fit & proper tests and cross-border examinations; meets host supervisors during visits. - OJK exchanges information on risk profile, stress tests, recovery plans, AML/CFT issues, and regulatory changes. - Crisis cooperation and resolution planning: - LPS is the resolution authority; OJK has MoU with LPS and engages foreign supervisors on recovery and resolution issues. - No established practice of developing group resolution plans for Indonesian groups with non-material cross-border operations. - Assessment of Principle 13: Compliant. ### Corporate governance (Principle 14; EC1–EC9) - Regulatory updates and expectations: - Company Law and FSOL 2023 require banks to apply principles of good governance; OJK issued updated corporate governance regulation 17/POJK.03/2023 (not subject to graded assessment but noted). - Corporate governance requirements and guidance spread across OJK regulations: fit & proper, risk management, internal control, remuneration, public disclosure. - OJK 2023 Corporate Governance Regulation introduces requirements on shareholders, dividend restrictions, remuneration, anti-fraud, sustainable finance, and group-wide policies. - Board roles, fit & proper, and committees: - Fit & proper test requirements applied to BoC and BoD (POJK 27/POJK.03/2016). - BoC must have at least three members with 50 percent independent commissioners; Audit, Risk Oversight, Remuneration & Nomination committees required, each with at least one independent Commissioner (POJK 55/POJK.03/2016). - State-owned banks: Minister of State-Owned Enterprises/Ministry of Finance selects candidates, with OJK performing fit & proper tests. - Shortcomings identified: - BoC role and effectiveness require strengthening; BoC members designated as “independent” may serve extended periods with exemptions and executive management may migrate to BoC after a 1 year cooling-off period. - OJK should challenge BoC more and hold them accountable for oversight and governance. - OJK’s assessments focus on compliance checks and semi-annual soundness ratings but lack a holistic on-site assessment of corporate governance effectiveness and control functions. - Fit & proper testing could be strengthened for independent BoC members and heads of control functions; consider requiring heads of control functions to be subject to fit & proper and prior approval. - Assessment of Principle 14: Materially Non-Compliant. - Comments: New regulation and increased focus noted, but significant shortcomings in evaluating implementation and effectiveness of corporate governance (BoC role, independence, on-site assessment depth). ### Risk management process (Principle 15; EC1–EC14) - Regulatory framework: - POJK 18/POJK.03/2016 sets comprehensive risk management requirements; SEOJK 34/SEOJK.03/2016 circular provides additional detail. - Requirements include risk culture, risk limits aligned with risk appetite, management information systems, documentation, stress testing, contingency planning, model validation expectations, and reporting to Board/BoC. - Supervisory assessment practice: - Semi-annual RBBR assessment incorporates ICAAP, RAS, internal reports, and other inputs; on-site examinations provide primary assessment of implementation. - OJK conducts both bottom-up and top-down stress testing; banks submit forward-looking stress testing results. - Key gaps and findings: - Risk culture assessment is limited; supervisors have limited evidence of detailed risk culture evaluation and three-lines-of-defense dynamics. - ICAAP integration into SREP is limited; OJK ensures submission of ICAAP but limited evidence of deep evaluation of capital planning, stress-testing assumptions, and integration into capital adequacy assessments. - Stress testing: banks perform stress testing but OJK provides limited critical engagement to improve stress testing design and use of outputs in capital/decision-making; limited evidence that stress test outputs are used to adjust risk appetite, limits, or capital planning. - Model governance and validation require more supervisory attention; no banks accredited to use internal models for regulatory capital, but models widely used for risk management and scoring; OJK’s focus on model validation and board oversight of models is limited. - Information systems, new product approval processes, and contingency planning are in regulatory requirements but supervisory verification during on-site inspections can be enhanced. - Assessment of Principle 15: Materially Non-Compliant. - Comments: Comprehensive regulatory framework exists and supervisory processes are structured, but supervisory execution needs strengthening in assessing risk culture, ICAAP depth and integration, stress testing effectiveness, and model governance. ### Capital adequacy (Principle 16; EC1–EC2) - Regulatory framework and alignment: - OJK has adopted the Basel III capital framework through POJK No. 11/POJK.03/2016 as amended; minimum Tier 1 and CET1 ratios set at 6.0 percent and 4.5 percent respectively. - Additional buffers: capital conservation buffer, countercyclical buffer, and capital surcharge for D-SIBs. - RWA calculation: standardized approaches for credit, market and operational risk adopted via SEOJK and POJK regulations with transition dates (e.g., operational risk SEOJK 6/SEOJK.03/2020 effective Jan 2023; credit risk SEOJK 24/SEOJK.03/2021 effective Jan 2023; market risk SEOJK 23/SEOJK.03/2022 to come into force 1 January 2024). - Interest rate risk in the banking book regulated via SEOJK 12/SEOJK.03/2018; circular guidance for central counterparty exposures and margin requirements issued (16/SEOJK.03/2023; 17/SEOJK.03/2023). - Leverage ratio applied to all banks (POJK no 31/2019). - System metrics: - CAR of Indonesian Banks is high around 24,57 percent (Apr-2023). - Macroprudential coordination: - BI implements Countercyclical Capital Buffer (CCyB) per BI Regulation No.17/22/PBI/2015 within 0-2.5 percent of RWA; BI evaluates CCyB at least once every six months; as of April 2023 CCyB held at 0 percent. - BI coordinates with OJK before CCyB changes. - Supervisory actions tied to capital: - Banks under intensive supervision if CAR is below minimum requirement but above 8 percent (POJK 15/POJK.03/2017); remedial requirements include recovery plan submission and supervisory actions. - OJK can increase minimum capital for individual banks when assessed necessary (Article 2 paragraph (4) of POJK No. 11/POJK.03/2016). - Observations and limitations: - Regulations align largely with Basel standards; composition of capital emphasizes CET1 and Tier 1. - Regulations do not specify minimum capital conservation standards when buffers are breached; OJK has powers to restrict dividends and distributions but their use is discretionary and may fall short of Basel expectations in some cases. - Assessment of Principle 16: (assessment continued in source beyond provided excerpt). *Source: IMF Financial Sector Assessment content (extract provided).* ### 1. The minimum Tier 1 capital is set to 6 percent of RWA while the minimum CET 1 is 4,5 ### 1. The minimum Tier 1 capital is set to 6 percent of RWA while the minimum CET 1 is 4,5 percent of RWA ### Capital requirements and composition - Minimum Tier 1 capital: 6 percent of RWA. - Minimum CET 1: 4,5 percent of RWA. - Tier 2 capital calculated as Bank’s capital should not exceed 100 percent of Tier 1 capital. - Eligibility criteria and reduction factors for each type of capital follow the Basel III framework. - Banks are required to calculate both on-balance sheet and off-balance sheet risks in the calculation of prescribed capital requirements. ### Capital buffers and systemic surcharges - Capital conservation buffer: 2,5 percent of RWA. - Countercyclical buffer: may be set within the range of 0 percent to 2,5 percent of RWA. - D-SIB surcharge: determined based on systemic importance ranging from 1 percent to 2,5 percent of RWA. - OJK may set a higher capital surcharge for D-SIBs when deemed necessary (there were 13 D-SIBs at the time of the mission). ### Deviations from Basel III identified by assessors - Zero-risk weighting of government bonds issued in the US dollar and central bank debt; bank exposures to US denominated government securities are material for calculation of RWA’s. The BCBS’s RCAP assessment of OJK’s capital framework identified this issue. - OJK has issued the Basel III amendments to calculating regulatory capital for market risk which will be implemented January 1, 2024. Currently, banks use the Basel II framework to calculate regulatory capital. ### Supervisory powers, SREP, and Pillar 2 - OJK has the power to impose higher minimum capital requirements, specific capital charges, and/or limits on material risk exposures, including for risks not adequately transferred or mitigated through transactions (e.g., securitization). - OJK can impose higher capital requirements, mandate improvements in risk management, mandate reduction in risk exposure, and place restrictions on banks’ business models, activities, and distributions. - OJK applies a well-developed SREP process for determining Pillar II capital add-ons and assesses banks’ capital adequacy using a top-down approach that compares risk profile and risk management framework to current capital levels. - OJK assesses banks’ ICAAP annually (and if changes in risk profile or capital strategy occur). Banks submit their ICAAP twice per year. - Internal processes are in place to structure the application of expert judgment in SREP; findings are discussed with bank management and corrective actions (e.g., increase capital, reduce exposures, improve risk management) are monitored. ### Forward-looking capital management and stress testing - OJK requires banks to undertake stress testing as part of ICAAP; banks prepare market-wide and idiosyncratic scenarios for base case and severe conditions. - OJK undertakes its own annual stress testing in collaboration with BI, jointly determining scenario assumptions and using supervisory information and bank data. - OJK evaluates capital plans alongside business plans, including assumptions for loan growth, net interest margin, operating costs, revenue, and cost of credit; capital plans must include sources of additional capital, contingency capital plans, and recovery plans. - For state-owned banks and foreign bank subsidiaries, OJK requests formal letters of commitment (Ministry of Finance letters for state-owned banks; letters of commitment requested for foreign bank subsidiaries). ### Minimum capital requirements by bank risk profile (Article 2 POJK No. 11/POJK.03/2016) - 8 percent when the Bank's risk profile rating is 1; - at least 9 percent but less than 10 percent when the Bank's risk profile rating is 2; - at least 10 percent but less than 11 percent when the Bank's risk profile rating is 3; and - at least 11 percent but less than 14 percent when the Bank's risk profile rating is 4 or 5. - If the bank’s self-assessment yields a lower minimum capital than OJK’s assessment, the higher minimum capital requirement will be imposed (Article 45 POJK 11/POJK.03/2016). ### Use of internal models (EC5) and supervisory stance - OJK has not approved banks to use internal models to calculate regulatory capital. - Internal models are used by banks for risk measurement and management and interact with capital calculation; OJK supervision manual (Annex 1 of SEBI No.13/36/INTERN) provides guidance for assessing banks’ use of internal models and specifies rigorous qualifying standards. - OJK typically is aware of banks’ model validation processes and engages with the bank’s internal audit function and external auditors, though OJK does not typically undertake detailed validation assessments itself. ### Assessment summary (Principle 16) - Assessment: Largely Compliant. - OJK has implemented the Basel III capital framework, establishes minimum capital ratios and buffers, routinely performs comprehensive assessments of capital adequacy against material risks, and demonstrates willingness to exercise SREP and apply capital add-ons. - Two deviations from Basel III were identified: zero-risk weighting on US dollar government bonds and the need to implement Basel III market risk capital amendments (implementation date January 1, 2024; current practice uses Basel II). ### Credit risk oversight (Principle 17) — supervisory expectations and findings (high-level) - OJK requires banks to have appropriate credit risk management processes that provide a comprehensive bank-wide view of credit risk exposures consistent with size and complexity (SEOJK 34/SEOJK.03/2016; Appendix II.2.2.a SEOJK 14/SEOJK.03/2017). - Supervisory assessment covers four pillars: (1) credit risk governance, (2) credit risk management framework, (3) credit risk management processes (identification, measurement, monitoring, control) and management information systems, and (4) internal control system. - POJK 42/POJK.03/2017 requires banks to prepare and implement credit policies covering: prudential principles in credit; organization and management of credit; policies regarding credit approval; credit documentation and administration; settlement of problem loans. - Onsite examinations are the main supervisory tool for credit risk, conducted annually; supervisors are onsite for approximately 20-25 working days and sample approximately 25 credit files per examination using a risk-based sampling approach that targets corporate, SME, retail, large exposures, related party loans, and portfolios with asset quality or provisioning anomalies. - Specific expectations include documented and communicated credit policies and procedures; clear approval frameworks for amendments, renewals, and refinancing; monitoring to identify problem assets and ensure adequate reserves; adequate information systems for identification, aggregation, and reporting of credit exposures to boards and senior management; credit limits consistent with risk appetite and communicated to relevant staff; exception tracking and watchlist review; and model validation where internal models are used (regulatory requirement for model validation). *Source: 1idnea2024004-print-pdf* ### 1. understand the latest financial conditions of debtors or opposing parties ### 1. understand the latest financial conditions of debtors or opposing parties ### Monitoring and credit risk management objectives - Banks are required to: - understand the latest financial conditions of debtors or opposing parties including obtaining information about the composition of debtor assets and growth trends; - monitor compliance with the requirements stipulated in the credit agreement or other transaction contracts; - assess the adequacy of collateral on a regular basis compared to the obligations of the debtor or counterparty; - identify problems properly including inaccurate payments and classify potential credit problems in a timely manner for remedial action; - deal with problem loans quickly; and - identify the level of credit risk as a whole or per certain type of asset. - Banks access the centralized credit bureau (SLIK) where debtor data is contained. - Banks are required to report all exposures to SLIK which helps banks assess total indebtedness at the time of origination. - While OJK supervisors assess the process of monitoring and controlling credit risk, there is no obligation in OJK regulations for banks to take total indebtedness into account when assessing an obligor’s capacity to repay. - Assessors saw examples where the OJK onsite examination assessed bank’s underwriting and made recommendations regarding total indebtedness. - Ultimately, OJK relies on general requirements for banks to apply a prudent approach to assessing credit. ### EC5 — conflicts of interest and arm’s length credit decisions - The supervisor requires that banks make credit decisions free of conflicts of interest and on an arm's length basis. - Regulatory basis: - SEOJK 34/SEOJK.03/2016 (Point II. A. 3. b. 3) requires policies and procedures to ensure all activities of providing funds are carried out on an arm's length basis. - Chapter IV.D.3 Attachment to POJK 42/POJK.03/2017 requires credit/financing decisions to be based on an honest, objective, accurate and thorough assessment independent of interested parties. - Findings: - Assessors saw evidence that the OJK dedicated sufficient attention to enforcing compliance with regulations for credit decisions to be free of conflicts of interest. ### EC6 — limits requiring Board or senior management approval - The supervisor requires credit policy to prescribe that major credit risk exposures exceeding a certain amount or percentage of the bank’s capital are to be decided by the bank’s Board or senior management, and similarly for especially risky or non-mainstream exposures. - Regulatory basis: - Chapter IV.C.1 POJK 42/POJK.03/2017 requires written limits for credit approval in the board of director's policy specifying the amount of Credit and appointed officials. - Chapter II.B.2 and Chapter II.B.2.b Attachment to POJK 42/POJK.03/2017 require main policies for related parties and/or certain large debtors to include: - a. maximum limit on the total provision of Credit or Financing facilities that will be provided to these parties; and, - b. procedures for providing Credit or Financing to these parties which will be syndicated, consortium, and risk shared (risk sharing) with other Banks. - Findings: - Assessors saw examples where OJK onsite examinations reviewed governance of delegations of approvals, credit committee minutes, and files to assess credit approval processes. - Delegations are a focus due to decentralized branch-level credit approvals in many banks. ### EC7 — supervisory access to credit information and personnel - The supervisor has full access to information in the credit and investment portfolios and to the bank officers involved in assuming, managing, controlling, and reporting on credit risk. - Regulatory basis and practices: - Article 6 (1) POJK 41/POJK.03/2017 grants OJK powers to require immediate disclosure/provision of books, files, drafts, records, instructions, memoranda, documents, electronic data, and all information/explanations related to credit activities during bank examination. - Banks are required to periodically report information related to credit portfolios and credit risk pursuant to POJK 63/POJK.03/2020 and POJK 64/POJK.03/2020. - OJK has full access to credit related bank reports submitted to BI according to PBI 23/8/PBI/2021. ### EC8 — inclusion of credit exposures in stress testing - The supervisor requires banks to include their credit risk exposures into their stress testing programs for risk management purposes. - Regulatory basis and practices: - SEOJK 34/SEOJK.03/2016 (Point II. A. 3. c. 2) g) requires banks to conduct stress testing periodically to support credit risk analysis. - Evidence seen of OJK assessment of banks’ stress testing and use of outputs in credit risk assessment. - OJK undertakes periodic stress testing, at least annually, in addition to individual bank testing exercises; results are compared and differences examined. ### Assessment of Principle 17 - Overall assessment: Largely Compliant - Comment: - Credit risk is a major risk in Indonesian banks and consumes the majority of risk-weighted assets. - OJK has issued regulations requiring banks to have robust credit risk management and assesses implementation to determine whether banks have processes that take into account risk appetite, risk profile, and market and macroeconomic conditions. - OJK assesses whether banks have implemented prudent policies and processes to identify, measure, evaluate, monitor, report and control or mitigate credit risk (including counterparty credit risk and concentration risk) on a timely basis, covering the full credit lifecycle including underwriting, evaluation, and ongoing management of loan and investment portfolios. - A strength is granular assessment of exposures approved at branch level, providing a detailed view of policy application. - Area for improvement: onsite examinations would benefit from greater use of credit risk specialists and adopting more of a portfolio view of credit risks to draw conclusions across the industry, including assessment of: - adequacy of credit risk management; - risks of new lending vis a vis risk appetite; - effectiveness of independent challenge applied by the second line of defense. ### Principle 18 — problem assets, provisions and reserves (overview) - Principle summary: The supervisor determines that banks have adequate policies and processes for early identification and management of problem assets, and the maintenance of adequate provisions and reserves. ### EC1 — policies and processes for problem assets and regular review - Laws/regulations require banks to formulate policies/processes for identifying and managing problem assets and to regularly review problem assets and asset classification, provisioning, and write-offs. - Regulatory basis and findings: - Chapter VII of the Annex of POJK 42/POJK.03/2017 requires banks to formulate policies/processes for identifying and managing problem assets on individual and consolidated levels and to review problem assets regularly. - Article 2, 3 of POJK 40/POJK.03/2019 concerning Asset Quality Assessment requires banks to prudently manage assets and assess quality per OJK regulation; where OJK assessment differs from bank’s, the supervisor's assessment applies and the bank must adjust reports and publication (Article 2). - Loan performance assessment includes four components: (i) profitability; (ii) capital structure; (iii) cash flow; and (iv) sensitivity to market risk (Article 11). - Solvency assessment factors include timely principal and interest payments, compliance with credit documentation etc. - Credit quality categories (Article 12): performing, special mention, sub-standard, doubtful and non-performing. - Prescribed provisioning (Article 44) calculated as follows: - Performing – 1 percent - Special mention – 5 percent - Substandard – 15 percent - Doubtful – 50 percent - Non-performing – 100 percent - Banks are required to implement policies for restructured loans (Articles 55–57) and develop policies for write-offs (Article 67). ### EC2 — adequacy of grading/classification and provisioning methodologies - The supervisor determines adequacy of banks’ policies/processes for grading and provisioning, including review of external experts’ work. - Regulatory basis and practices: - Chapter III of Annex 1 of SEBI No.13/36/INTERN: supervisors assess grading/classification and robust provisioning methodology in compliance with POJK 40/POJK.03/2019. - OJK reviews bank compliance in asset quality determination; credit risk and asset quality are main priorities in supervisory action plans. - Evidence of asset quality focus in onsite examinations and routine offsite analysis where banks submit detailed information. - OJK engages external auditors: - Article 2 POJK No.9 of 2023 and Article 9 POJK 41/POJK.03/2017 require Public Accountant Firms to conduct audits including reviewing adequacy of policies/processes. - External experts must communicate with OJK before inspections; OJK engages audit firms to discuss asset quality and obtain inputs on banks’ risk management and policy application. ### EC3 — treatment of off-balance sheet exposures in classification and provisioning - The supervisor determines that the bank’s classification and provisioning system takes into account off-balance sheet exposures. - Regulatory basis and practices: - Chapter III of Annex 1 of SEBI No.13/36/INTERN: supervisors assess grading/classification and provisioning methodology for both on and off balance in accordance with relevant regulations. - Article 28 of POJK 40/POJK.03/2019 outlines requirements for determining asset quality for both on and off-balance sheet assets. - Chapter III.A.3.d.1) Annex of SEDK 4/SEDK.03/2015 (Risk Based Examination Guidelines for Credit Risk Examination) requires supervisors to ensure bank’s classification/provisioning via a general inspection carried out once a year with credit risk as main focus. - Supervisors assess whether banks have adopted PSAK 71 aligned with IFRS 9. - OJK takes a sample of loans during onsite examinations that includes off-balance sheet exposures. ### EC4 — timeliness and realism of provisions and write-offs - The supervisor determines banks have appropriate policies/processes to ensure provisions and write-offs are timely and reflect realistic repayment and recovery expectations, considering market and macroeconomic conditions. - Regulatory basis and findings: - Chapter III of Annex 1 of SEBI No.13/36/INTERN: supervisors assess grading/classification and provisioning methodology for both on and off balance per relevant regulations. - POJK 40/POJK.03/2019 requires banks to have written policies/procedures regarding write-offs in accordance with accounting standards. - Chapter III.A.3.d.1) Annex of SEDK 4/SEDK.03/2015 requires supervisors to ensure banks have appropriate policies/processes regarding provisions and write-offs. - Assessors saw evidence of OJK onsite examinations assessing banks’ policies for problem assets and application of write-off policies. - OJK supervisors assess management of longer dated NPLs from secured and unsecured portfolios and governance processes (Article 67 of POJK 40/POJK.03/2019). ### EC5 — early identification, oversight, collection, and testing for circumvention - The supervisor determines banks have appropriate policies/processes and organizational resources for early identification of deteriorating assets, ongoing oversight of problem assets, and collection on past due obligations. - For homogeneous portfolios, exposures are classified when payments are contractually in arrears for a minimum number of days (e.g., 30, 60, 90 days). - The supervisor tests banks’ treatment of assets to identify material circumvention of classification and provisioning standards (e.g., rescheduling, refinancing or reclassification of loans). - Description and findings re EC5 are contained in the source text (text truncated at this point in the supplied content). *Source: 1idnea2024004-print-pdf - 1. understand the latest financial conditions of debtors or opposing parties* ### Chapter VI.C.3 POJK 42/POJK.03/2017 regarding Requirement to Prepare and Implement ### Chapter VI.C.3 POJK 42/POJK.03/2017 regarding Requirement to Prepare and Implement ### Legal and regulatory framework for credit classification and provisioning - POJK 42/POJK.03/2017 (Annex Chapter VII) requires banks to prepare and implement Credit Policies and to monitor credit potentially causing losses, including lists of non-performing assets and performing assets with deteriorating quality. - Article 12 POJK 40/POJK.03/2019: Banks must classify credit quality within 5 qualities: Current, Special Mention, Substandard, Doubtful, Loss, based on business prospect, debtor performance, and repayment capacity. - Repayment-capacity indicators by arrears: - Current: no payment in arrears. - Special Mention: up to 90 days in arrears. - Substandard: between 90 to 120 days in arrears. - Doubtful: between 120 to 180 days in arrears. - Loss: over 180 days in arrears. - Prudential provisioning (based on asset quality) required: - Current: 1 percent of total portfolio. - Special Mention: 5 percent of net total portfolio. - Substandard: 15 percent of net total portfolio. - Doubtful: 50 percent of net total portfolio. - Loss: 100 percent of net total portfolio. - Article 51 POJK 40/POJK.03/2019: banks must provide provisions according to financial accounting standards (IFRS 9). - Article 14 of POJK No.11/POJK.03/2016 as amended by POJK No. 27 year 2022 (POJK KPMM): if the accounting provision (based on asset quality) is less than the prudential provision (based on IFRS9/PSAK 71), the difference is deducted from tier 1 capital. - Article 6 (1) POJK 41/POJK.03/2017: banks must immediately disclose and/or provide to OJK during bank examination books, files, draft, records, instructions, memorandum, documents, electronic data, including their copies, and all information and explanation verbally as well as in written form related to credit activities. - POJK 63/POJK.03/2020 and POJK 64/POJK.03/2020: periodic reporting requirements for credit portfolios and credit risk. - PBI 23/8/PBI/2021: OJK has full access to credit-related bank reports submitted to BI. - SEBI No.13/36/INTERN (Annex 1, Chapter III) and SE DK 4/SEDK.03/2015 (Risk Based Examination Guidelines for Credit Risk Examination) provide supervisory guidance on monitoring, testing, and assessing banks’ classification and provisioning. ### Supervisory access, monitoring, and offsite/onsite practices (EC6) - OJK receives comprehensive offsite regulatory reporting from banks for input into offsite supervision; data are assessed quarterly, semi-annually and annually. - OJK demonstrated detailed onsite assessments of bank policies and processes for NPLs and problem loans; onsite examinations are frequent and complemented with offsite analysis. - EC6 requirement: supervisor obtains information on a regular basis, and in relevant detail, or has full access to information concerning the classification of assets and provisioning; supervisor requires banks to have adequate documentation to support their classification and provisioning levels. - OJK staff meet senior management responsible for asset quality and provisioning and review minutes of credit committees, BoD and BoC as part of onsite examinations. ### Assessment of classification and provisioning adequacy and supervisory powers (EC7) - EC7: supervisor assesses whether classification of assets and provisioning is adequate for prudential purposes and can require adjustments to classifications, provisioning, reserves or capital and impose remedial measures. - SEBI No.13/36/INTERN requires supervisors to assess reliability of asset classification approaches and whether provisioning is timely, transparent, adequate, and well documented. - If there is a difference in asset quality classification between Bank and supervisor, Article 3 of POJK 40/POJK.03/2019 requires the bank to adjust classification in accordance with the supervisor. - Supervisory guidance in SE DK 4/SEDK.03/2015 supports testing for material circumvention of classification and provisioning standards. ### Valuation of collateral and risk mitigants (EC8) - EC8: supervisor requires banks to have mechanisms for regularly assessing the value of risk mitigants; collateral valuation should reflect net realizable value, considering prevailing market conditions. - Article 47 POJK 40/POJK.03/2019: collateral used as deduction factor of provision must be assessed as follows: - Independent appraiser required for Earning Assets from a debtor or Borrowing Group with the amount of more than Rp10,000,000,000.00 (ten billion rupiah). - Bank internal appraiser permitted for Earning Assets from a debtor or Borrowing Group with the amount of up to Rp10,000,000,000.00 (ten billion rupiah). - Collateral deduction percentages example for Lands and/or buildings used as residential property: - no higher than 70 percent of the value when assessed by an independent appraiser within the last 18 (eighteen) months. - no higher than 50 percent of the value when assessed by an independent appraiser exceeding the last 18 (eighteen) months but not yet exceeding the last 24 (twenty-four) months. - OJK tests and examines bank policies and processes for collateral valuations and adjusts supervisory findings where needed. ### Problem asset identification, reclassification, and forbearance (EC9) - EC9: laws/regulations/supervisor establish criteria for (a) identification of problem assets and (b) reclassification to performing. - POJK 40/POJK.03/2019 establishes criteria to classify assets into 5 categories from performing to non-performing and prescribes reclassification conditions. - OJK published forbearance regulations commencing in 2020 (COVID-19), aligned with the Basel framework on prudential treatment of problem exposures; forbearance rules include re-classification from restructured to performing and have been revised several times to adapt to economic and sector factors. - At the time of the mission, forbearance measures remained in place for certain SME exposures and were subject to OJK attention for compliance with reporting and risk management obligations. ### Board oversight and risk information for asset quality (EC10) - EC10: supervisor determines that the bank’s Board obtains timely and appropriate information on the bank’s asset portfolio, including classification, provisions and major problem assets, with at least summary results of the latest asset review process and trends in problem assets. - Chapter IV of Annex 1 of SEBI No.13/36/INTERN: supervisors assess whether banks' credit risk management information systems provide timely and accurate information for credit risk monitoring, including classification of assets, level of provisions and reserves and major problem assets. - Onsite examination is primary supervisory activity that evaluates Board oversight of asset quality; OJK allocates significant attention to governance processes for oversight of problem assets, loan classification and provisioning. ### Individual assessment thresholds and use of credit bureau data (EC11) - EC11: supervisor requires valuation, classification and provisioning, at least for significant exposures, to be conducted on an individual item basis and banks to set and review thresholds for significant exposures. - Exposures above IDR 5 billion are required to be assessed and classified on an individual basis under OJK regulations. - In practice, banks often assess exposures on an individual basis at lower levels; supervisors sample large loans with impairment onsite. - OJK has access to credit bureau data which supports monitoring of asset quality. ### System-wide trends, concentrations and provisioning adequacy (EC12) - EC12: supervisor regularly assesses trends and concentrations in risk and risk build-up across the banking sector in relation to problem assets and considers the adequacy of provisions and reserves at the bank and system level. - OJK considers concentrations and the potential effect of risk mitigation strategies on mitigant efficacy in its supervisory assessments; offsite and onsite analyses inform assessments of provisioning adequacy. *Source: Chapter VI.C.3 POJK 42/POJK.03/2017 regarding Requirement to Prepare and Implement (1idnea2024004-print-pdf).* ### Chapter IV of Annex 1 of SEBI No.13/36/INTERN specifies the monitoring and controlling ### Chapter IV of Annex 1 of SEBI No.13/36/INTERN — Monitoring and Controlling Credit Risk ### Monitoring and controlling process (overview) - Requires a Bank to have a comprehensive system to monitor the condition of its assets individually or a group of debtors. - Monitoring procedure must set criteria to identify and report problem assets to ensure problem assets receive more attention, including rescue actions and the establishment of sufficient reserves. - Monitoring system should be able to monitor the composition and quality of assets individually and as a whole to anticipate concentration risk. - OJK practices: - Offsite analysis is regularly performed; asset quality indicators are a high priority in monthly, quarterly and semi-annual risk assessments. - A comprehensive assessment of asset quality is undertaken as part of the bank soundness rating, including individual bank assessments and peer group benchmarking. - Onsite supervision considers adequacy of provisions and reserves at bank and system level. - Assessors saw evidence that this analysis is effective. ### Assessment of Principle 18 - Compliance status: Compliant. - Findings: - OJK has issued regulations requiring banks to have adequate policies and processes for identification and management of problem assets and maintenance of adequate provision and reserves. - OJK allocates significant attention to asset quality throughout the supervisory cycle and tests governance processes for management oversight of problem assets, loan classification and provisioning. - Asset quality is a priority area; OJK assesses adequacy and implementation of policies and processes. - Assessors observed effective implementation of analysis on provisions and reserves. ### Principle 19 — Concentration risk and large exposure limits (scope and expectations) - Principle summary: - Supervisor determines banks have adequate policies/processes to identify, measure, evaluate, monitor, report and control or mitigate concentrations of risk. - Supervisors set prudential limits to restrict bank exposures to single counterparties or groups of connected counterparties. ### EC1 — Comprehensive bank‑wide view of concentration risk - Regulatory framework: - OJK has adopted the Basel Large Exposure standard via Article 3 of POJK 32/POJK.03/2018 (as amended by POJK 38/POJK.03/2019). - Regulations extend to on-balance sheet, off-balance sheet, and contingent liabilities. - Banks must have policies, guidance, and written procedures regarding large exposures. - RCAP result on Large Exposure (published 2020) concludes Indonesia regulation on large exposure is compliant with the Basel standard. - Gaps and findings: - Regulations are not specific in requiring banks to have a comprehensive bank-wide view of significant sources of concentration risk beyond credit. - Offsite reporting captures on- and off-balance sheet and contingent liabilities; OJK collects detailed loan data by economic sector, loan type, geography and concentration in liabilities (through top 50 deposits). - Risks from other sources of concentration risk (e.g., market risk, product or collateral concentrations) are not explicitly assessed, particularly for banking groups and FCs. - OJK has processes to share risk information across banking, insurance, finance companies and securities, with examples of functioning sharing, but other regulations (such as the Legal Lending Limit) do not go far enough. - Recommendation implied: explicit requirement for banks to measure and manage concentration risks integrating exposures across business units, subsidiaries and potential bank-wide (and group-wide) concentrations should be strengthened. ### EC2 — Information systems to identify and aggregate exposures - Reporting and supervision: - Banks required to report total exposures to each counterparty or group of connected counterparties, especially for large exposures (above 10 percent of banks' tier 1 capital), on a monthly basis. - OJK performs validation exercises and has deployed technology solutions to capture and evaluate credit data and verify accuracy. - Onsite examinations verify bank reporting on balance sheet items and reporting to the credit bureau (SLIK). - Onsite supervision focuses on large exposures and the large exposure report; processes were seen as adequate where concentration risks arise only from credit risks. - Gap: - Where obligors/groups have exposures beyond credit (market risk, derivatives, off-balance sheet), the approach may not have sufficient coverage. ### EC3 — Bank risk management thresholds and Board reporting - Findings: - Supervisors analyze bank policies on concentration risk to ensure adequate risk appetite and risk profile. - Supervisors conduct a semi-annual prudential meeting with banks to explain risk profile assessment results and underlying considerations. - OJK relies on Legal Lending Limit (LLL) regulation to provide assurance concentration risk is managed; LLL limits exposures between bank and related parties to not exceed 10 percent capital. - Gap: concentration risk arises from a broader range than related parties; supervisory files show room for improvement to ensure banks identify, monitor, report and assess concentration risks. ### EC4 — Regular information on sectoral, geographical and currency concentrations - Reporting requirements and practice: - Banks are not required to obtain prior approval before approving a large exposure; banks report at the end of the reporting period (for LE this is monthly). - Regulations (POJK 63/POJK.03/2020 and POJK 64/POJK.03/2020) require periodic reporting related to credit portfolios and credit risk. - OJK has full access to credit-related bank reports submitted to BI according to PBI 23/8/PBI/2021. - Under PBI 23/8/PBI 2021 (Integrated Commercial Bank Report), banks must report credit portfolio by economic sector, geographical location, and currency. - Routine reporting is complemented with at least annual onsite examinations typically focused on credit risk. ### EC5 — Definition and application of “group of connected counterparties” - Regulatory stance: - Article 17 of POJK 32/POJK.03/2018 explicitly prescribes criteria for grouping connected counterparties; supervisors must apply the regulatory definition and do not have discretion for case-by-case interpretation. - The LLL regulation defines connected counterparties where a borrower has control relationships via ownership, management, and/or financial relationships; indirect exposure via guarantees is classified as exposure (Article 17 (2) e). - OJK requires banks to identify and verify connected counterparties; as part of KYC banks request information from potential debtors. - Practice and gap: - OJK has used moral suasion to encourage banks to treat identified connections (not included in Article 17) as single exposures, but regulators lack explicit power to compel alternative groupings — a weakness that should be rectified. - Onsite examinations examine connected obligors in detail; evidence was seen by assessors. ### EC6 — Prudential requirements to control large credit exposures (limits and exemptions) - Legal limits and scope: - POJK 32/POJK.03/2018 sets maximum limits to control large credit exposures (Legal Lending Limit/BMPK); Article 21 requires calculation of LLL and large exposure for all transactions in banking book and trading book, including off-balance sheet exposures (Article 38). - Supervisors monitor limits on a solo and consolidated basis (Article 2). - Article 6 and Article 16 set legal lending limits: - Related parties: 10 percent of total capital. - Single counterparty other than related parties or groups of connected counterparties: 25 percent of Tier 1 capital. - Exception for state-owned banks: limit is 30 percent. - Exemptions from LLL calculation (Article 42–46 and Article 43 specifics): - Exemptions include: - Provision of Funds to the central government; - Placement at BI; - Purchase of Securities issued by the Government of the Republic of Indonesia and/or BI; - Guarantees from the Government of the Republic of Indonesia (Article 43); - Provision of export-oriented funds to financial institutions (Article 44); - Portion of Provision of Funds guaranteed by certain collateral meeting requirements (Article 45); - Portion of Provision of Funds to Borrowers guaranteed by Prime Bank where collateral meets requirements (Article 46). - Article 45 clarifies eligible collateral types (cash collateral in the form of demand deposits, time deposits, savings, security deposit and/or gold; and Securities issued by the Government of the Republic of Indonesia and/or BI). - Portion of Provision of Funds to support government programs guaranteed by state owned or regional owned guarantor or insurer is excluded from LLL calculation. - Treatment of LLL breaches: - If a Bank violates LLL and/or has an Exceeding of the LLL, the bank must prepare an action plan containing at least corrective steps and a target time for completion (Article 49). - Findings on concentration outcomes: - No aggregate limit exists. - For state-owned banks, exposure to the government via government bonds combined with exposures to state owned enterprises results in approximately 40-45 percent of total assets exposed to the government or government affiliated enterprises. - This leads to relatively large levels of concentration risk and a pronounced government-bank nexus in Indonesia’s banking system. ### EC7 — Stress testing for significant risk concentrations - Finding (introductory line from source): The supervisor requires banks to include the impact of significant risk concentrations into their stress testing programs for risk management purposes. - (Further details on implementation or findings for EC7 were not provided in the supplied content.) *Source: Chapter IV of Annex 1 of SEBI No.13/36/INTERN as reproduced in the provided IMF content unit.* ### Chapter IV of Annex 1 of SEBI No.13/36/INTERN stated that as part of concentration risk ### Chapter IV — Concentration, Related Parties, Country/Transfer, Market, Interest Rate and Liquidity Risk (Extract) ### Concentration risk (Principle 19) - Assessment: Largely Compliant - Findings: - SEBI No.13/36/INTERN (Chapter IV of Annex 1) requires supervisors to assess banks' stress testing as part of concentration risk management. - Supervisors conducted stress tests on credit portfolios affected by the Covid-19 pandemic; results can show the impact (cliff effect) of the termination of relaxation policies. - OJK requires, on a case-by-case basis, banks to conduct stress tests on specific concentration risks (example: decrease of commodity prices (coal) due to import restrictions from China; banks with large exposure required to calculate impact on capital). - Staff have analysed capital adequacy impact from default by largest debtors, but practice is not systematic across all banks. - Processes to assess significant risk concentrations in bank stress testing need improvement and did not meet the requirements of this EC. - OJK has adopted the Basel standard on large exposure and receives periodic bank reports on concentration risk and large exposure; RCAP result on Large Exposure (published in 2020) concluded Indonesia regulation on large exposure is compliant with the Basel standard. - Regulations and supervisory practice focus mainly on credit-originated concentration risks; non-credit sources of concentration risk are not explicitly assessed or required to be captured bank-wide. - OJK collects detailed loan data by sector, loan type, geography and concentration in liabilities (top 50 deposits), but risks from other sources (off-balance sheet, contingent liabilities, market risk, derivatives) are not explicitly integrated. - Gap: regulations do not provide powers for OJK to compel banks to treat counterparties as connected (EC5); OJK has relied on moral suasion in identified cases but the legal power gap remains. - Recommendation implications: - Strengthen processes to integrate significant risk concentrations into stress testing programs across all banks. - Broaden regulatory requirements and supervisory focus beyond credit risk to a bank-wide (and group-wide) view of concentrations (see EC1). ### Transactions with related parties (Principle 20) - Assessment: Materially Non-Compliant - Findings: - OJK regulation 32/POJK.03/2018 defines ‘related parties’ and ‘Provision of Funds’ but: - Definition of related parties (Article 9) does not explicitly encompass ‘close family members’, ‘direct and related interests’ of major shareholders, or some affiliated company relationships. - Definition of ‘Provision of Funds’ (Article 5) excludes non-credit dealings (service contracts, asset purchases/sales, construction contracts, lease agreements, borrowings including deposits from related parties, write-offs). - Related requirements are dispersed across credit risk, corporate governance, risk management, public disclosure regulations. - EC2 (arm’s length): Article 6 prohibits Provision of Funds contrary to general procedures but does not explicitly state arm’s length terms or specify terms (credit assessment, tenor, interest rates, fees, amortization schedules, collateral). Elucidations and Circulars provide some guidance but assessors lacked implementation information. - EC3 (Board approval & conflicts): Article 6 requires BoC approval for Provision of Funds but does not cover non-credit dealings or require prior approval of write-offs by BoC. Regulations do not explicitly require exclusion of conflicted BoC members from approval processes; corporate governance rules (POJK 55/POJK.03/2016, SEOJK No.13/SEOJK.03/2017) require disclosure and reporting of conflicts but are insufficient for full EC compliance. - EC4 (preventing conflicted persons from process): Corporate governance rules require disclosure and prohibit actions in conflicts, banks must report annually to OJK on transactions that contain conflicts; but OJK rarely verifies effectiveness in on-site inspections. - EC5 (limits/deduction/collateral): Article 5 of 32/POJK.03/2018 prescribes aggregate exposure limit to related parties at 10 percent of a bank’s capital (Tier 1 and Tier 2). Exposures to state-owned enterprises (SOEs) where central government obliged to fully support for national development are subject to a 30 percent of a bank’s capital limit; other SOE exposures subject to large exposure limit. Regulations do not explicitly require deduction of related party exposures from capital or mandatory collateralization, though OJK has powers to do so when necessary. - EC6/EC7 (identification, monitoring, reporting): OJK requires banks’ internal audit to review related party transactions; banks submit list of all related parties semi-annually and monthly related party transactions and compliance with aggregate limit; Annex II of 32/POJK.03/2018 specifies monthly reporting format for all exposures to related parties. - Supervisory practice: OJK reviews related party loans selected through sampling during on-site inspections; coverage limited recently. OJK has not used sanctioning powers in this area in the last five years. - Key numeric specifics: - Aggregate related party exposure limit: 10 percent of a bank’s capital (Tier 1 and Tier 2 capital). - SOE exposures under full central government support: 30 percent of a bank’s capital. - Recommendations/implications: - Consider a dedicated regulation for transactions with related parties to consolidate dispersed requirements. - Expand prudential definition of related parties to explicitly include close family members, direct and related interests of major shareholders, subsidiaries, affiliates, and key staff. - Explicitly cover non-credit related party dealings in the prudential definition and requirements. - Introduce provisions for prior BoC approval of write-offs related to related party exposures and explicit exclusion of conflicted BoC members from approval processes. - Strengthen on-site verification of effectiveness of banks’ conflicts of interest policies and supervisory use of corrective/sanction powers. - Final comment: OJK enhanced requirements and receives comprehensive information, but significant shortcomings remain; further enhancements needed to mitigate related party risks effectively. ### Country and transfer risk (Principle 21) - Assessment: Materially Non-Compliant - Findings: - SEOJK 34/SEOJK.03/2016 requires banks to have policies/procedures to identify credit risk from country risk, but specificity for country and transfer risk is minimal. - OJK-defined components of country risk include: 1) sovereign risk, 2) transfer risk, 3) macroeconomic risk. - For most banks, country risk exposure is limited due to domestic focus: - Only 5 banks have representative offices abroad or foreign branches. - Placements in foreign countries in April 2023: 1.9 percent of total assets. - Bank liabilities to banks in other countries in April 2023: 0.5 percent of total assets. - Foreign securities exposure owned by banks is less than 1 percent of total assets. - OJK applies a risk-based approach; country and transfer risk have had relatively minor attention in recent examinations. For banks with greater exposure, onsite analysis was robust; for others, routine offsite/onsite analysis is not explicit or sufficiently detailed. - Definition gap: framework identifies country/transfer risk from immediate risk perspective (location of operation or counterparty) but does not fully integrate the ultimate risk perspective (domestic counterparties whose ability to repay depends on fortunes of another jurisdiction). - Reporting gap: country risk not captured in routine reporting to the supervisor (EC6); on-site exam requests country-classified exposures but not systematically. - Stress testing gap: country and transfer risks are not routinely included in stress testing (EC5). - Recommendations/implications: - Broaden and clarify definitions and regulations to capture ultimate risk perspective of country and transfer risk. - Include country risk in routine supervisory reporting and offsite surveillance. - Require banks to include country and transfer risk scenarios in stress testing programs. ### Market risk (Principle 22) - Assessment: Compliant - Findings: - OJK regulations (SEOJK 34/SEOJK.03/2016 and Appendix; Chapter 3 of Annex II of SEBI No.13/36/INTERN) require banks to have market risk management processes proportionate to bank complexity and risk appetite. - Main sources of market risk: foreign exchange risk (IDR/US dollar) and interest rate risk; equity and commodities exposures are limited (banks not allowed direct exposures). - Supervisory metrics and controls: - Net Open Position (NOP) ratio monitored daily; regulatory limit: 20 percent of Tier-1 capital (end-of-day; can be larger intra-day). - SIP (Sistem Informasi Perbankan) used to summarize market risk measures including trading asset/liability significance, derivatives, and NOP. - Supervisory practice: - OJK assesses consistency with risk appetite, tolerance, capital strength, human resources, portfolio complexity, and market/macro conditions. - Regulators require daily valuations (PV01) and review market risk MIS, model outputs (VaR), stress tests, validation and independent model review (internal audit/external). - OJK adopted the Revised Market Risk framework of the final Basel III framework; implementation fully starting from Jan 2024 (SEOJK 23/SEOJK.03/2022). - OJK conducts semi-annual bank soundness assessments (RBBR) incorporating market risk; annual/top-down and bottom-up stress tests include market risk (currency and interest rate/yield shocks). - Recommendations/implications: - Enhance coverage of model governance validation by banks where gaps identified. - Continue to ensure daily valuation, independent validation, and robust stress testing linked to supervisory assessments. ### Interest rate risk in the banking book — IRRBB (Principle 23) - Assessment: Compliant - Findings: - SEOJK No. 12/SEOJK.03/2018 requires banks to have IRRBB strategies and frameworks covering identification, measurement (including model evaluation/validation), monitoring, reporting and mitigation. - Reporting requirements: - IRRBB implementation report: semi-annually. - IRRBB calculation report: quarterly (individual and consolidated). - Quarterly positions at end of March, June, September, December; semi-annual Bank Soundness self-assessment at end of June and December. - Measurement methodologies: - Economic Value of Equity (EVE) changes and Net Interest Income (NII) changes are main metrics. - Banks use 6 interest rate shock scenarios (Annex II SEOJK No.12/SEOJK.03/2018). - Outlier test: compare maximum ΔEVE value at quarter end based on 6 scenarios with 15 percent (fifteen percent) of core capital (Tier 1); results form hard limit; banks must establish buffer limits and mitigation measures when hard limit reached. - EVE calculation: consider exposures in a currency with a minimum amount of 5 percent (five percent) of total assets or liabilities in the Banking Book position. - Supervisory practice: - OJK assesses ALCO functioning, governance, reporting, and use of stress testing results in decision-making and ICAAP. - IRRBB has been a supervisory focus due to yield curve steepening in 2022 and into 2023. - OJK employs market risk specialists for complex assessments and validates shock scenarios against market conditions and balance-sheet characteristics. - Recommendations/implications: - Maintain robust supervisory validation of models and scenarios; ensure timely follow-up where EVE/NII exceed internal or regulatory limits. ### Liquidity risk (Principle 24) - Assessment: (implicit in text — framework aligns with Basel III; supervisory approach described) - Findings: - OJK has fully adopted Basel III liquidity standards: LCR and NSFR with Basel thresholds; RCAP for LCR (2016) and NSFR (2020) confirmed overall compliance. - Treatment and composition: - HQLA largely comprised of government bonds, placements with BI, and cash/notes (Level 1 assets); some Level 2 assets (corporate bonds) with haircuts. - Statutory Reserves held with BI excluded from HQLA definition below 9 percent threshold; balances above threshold count as eligible HQLA. - Run-off and depositor segmentation: - Depositors segmented into corporate and retail; retail “stable” defined as depositor having one other product with the bank; otherwise defined as less stable. - OJK applied run-off assumptions in line with Basel III LCR framework; OJK verified segmentation and run-off assumptions during LCR implementation discussions. - Supervisory monitoring and requirements: - Banks required to prepare business plan including funding plan (POJK No.5/POJK.03/2016); OJK analyses assumptions and receives monthly reporting on headline figures. - Banks required to prepare daily cash flow projections in IDR and foreign currency for at least the next 1 (one) week and present daily. - Supervisors monitor LCR, NSFR, maturity mismatches, funding concentration, unencumbered assets, and LCR for significant currencies; breaches trigger prescribed supervisory action and remediation aligned with Basel III and interact with recovery/resolution framework. - OJK assesses liquidity risk management along four pillars: Board oversight, policies/procedures and limits, identification/measurement/monitoring/controls and MIS, and internal control. - System observations: - Majority of domestically owned banks have structural surplus liquidity; foreign bank branches/subsidiaries rely on parent funding. - Loans to liability ratio for domestic banks approximately 80 percent. - Supervisory practice: - Frequency of onsite liquidity assessment is risk-based; banks with substantial liquidity exposure may be assessed annually. - OJK examines ALCO, independent RMU, treasury function, contingency funding plans, stress testing, and funding diversification. - Recommendations/implications: - OJK could perform more detailed analytical review of run-off assumptions, customer behavioral changes, and the practical application of LCR/NSFR by banks. - Continue to ensure robust funding diversification, maintenance of HQLA cushion, and regular testing of capacity to sell assets. *Source: Excerpt from Chapter IV of Annex 1 of SEBI No.13/36/INTERN (as presented in the provided PDF content).* ### Appendix 1,II.C.3.c.(2).l page 66), it is also stated that in carrying out stress testing for ### Appendix 1,II.C.3.c.(2).l — Liquidity, Operational Risk, Internal Control and Audit ### Liquidity risk (EC6–EC8, Principle 24) - Regulatory framework and key requirements: - POJK No. 42/POJK.03/2015: banks must maintain sufficient high-quality liquid assets in accordance with the LCR standard (Article 6). - HQLA criteria aligned with the Basel standard for LCR (fundamental, market, and operational requirements), including that it can be used, without impediment, to obtain funding in times of stress (Article 9). - Monitoring of funding concentration included within the LCR framework (Article 51). - SEOJK No. 34/SEOJK.03/2016: banks must have contingency funding plans (CFPs) adjusted to risk profile, stress testing results, complexity, scope, organizational structure, and systemic role; CFPs must be documented, evaluated, updated, and tested periodically. - POJK No.14/POJK.03/2017 regarding the Recovery Plan: systemic banks must submit Recovery Plan every year approved through the GMS; Board of Directors required to periodically evaluate and conduct stress testing using several scenarios including idiosyncratic and market-wide shock; Recovery Plan assessed by supervisors at least annually; the CFP is submitted to the OJK for analysis. - SEDK No.6/SEDK.03/2018: Guidelines for Implementing Banking Liquidity Stress Tests; SEOJK 34/SEOJK.03/2016 Annex 1 II.C.3.4(f): CFP minimum content and CFP reassessed by Board/ALCO minimum once a year. - CFP minimum elements (SEOJK No. 34/SEOJK.03/2016): - a. determination of indicators and/or events used to identify occurrence of crisis conditions; - b. the Bank's internal monitoring and reporting mechanism regarding indicators in (a) periodically; - c. strategies for dealing with various crisis conditions and decision-making procedures to act on changes in behavior and cash flow patterns that cause cash flow deficits; - d. strategies for obtaining financial support in crisis conditions considering costs and impact on capital and other aspects; - e. managerial coordination including determination of party authorized and responsible for identifying/implementing the funding plan emergencies, forming a special team in time of crisis; establishment of good communication strategies and procedures to internal parties; - f. internal reporting procedures for decision making by the management; - g. procedures for setting priority relationships with customers to address liquidity problems in crisis conditions. - Stress testing requirements and practice (EC7): - Banks required to include a variety of short-term and protracted bank-specific and market-wide liquidity stress scenarios (individually and in combination), using conservative and regularly reviewed assumptions. - Stress testing must measure the bank's ability to meet liquidity needs in crisis conditions using bank-specific and market stress scenarios; measurement tools must quantify liquidity risk in a timely and comprehensive manner. - OJK reviews periodic stress tests to include latest liquidity conditions in risk assessments; may request bank stress test results when liquidity conditions approach prudential thresholds (Liquid asset/third party fund, liquid asset/non-core deposit, LCR). - OJK undertakes stress testing annually in conjunction with BI; tests are top-down and bottom-up and results compared with individual bank results. - Banks must follow up stress testing results including: (i) adjusting Risk Management policies and strategies for Liquidity Risk, (ii) adjusting liquidity composition of assets/liabilities/admin accounts, (iii) developing or revising CFPs, and/or (iv) reviewing limits. - Foreign currency liquidity (EC8): - SEDK 6/SEDK.03/2018: supervisors assess liquidity coverage and conduct liquidity stress testing for banks carrying out significant foreign currency activity. - Reporting obligations allow supervisors to assess template foreign currency liquidity transformation and cash flow mismatch analysis across currencies. - Banks' main FX business is denominated in US dollars; where FX is above 5 percent banks required to calculate and report the LCR in that currency. The only currency reaching the 5 percent threshold is the US dollar. - Supervisory findings and assessment: - Assessment of Principle 24: Largely Compliant. - Comments highlight comprehensive Basel III implementation (LCR and NSFR) and strong supervisory financial analysis, RBBR inputs, and data on business plans and risk appetite. - Areas for improvement: deeper analytical assessment of run-off assumptions, liability segmentation, and processes for assessing changing customer behavior; maintain verification of customer segmentation and run-off assumptions, particularly given rapid digital developments and changes to banks' business models. - Supervisory practice: OJK receives granular data on run-off assumptions but requires more detailed analysis. ### Operational risk (Principle 25; EC1–EC8) - Regulatory framework and key regulations: - POJK 18/POJK.03/2016: Implementation of Risk Management for Commercial Bank. - SEOJK 34/SEOJK.03/2016: Implementation of Risk Management for Commercial Bank. - POJK 39/POJK.03/2019: Prudential Principles for Commercial Banks Which Outsource Part of Its Tasks to Other Parties. - SEOJK 6/SEDK.03/2020: calculation of RWA for Operational Risk. - POJK 11/POJK.03/2022: Implementation of Information Technology by Commercial Bank. - SEOJK 29/SEOJK.03/2022: Cyber Resilience and Security for Commercial Banks. - EC1 (framework requirements and four pillars): - Banks required to implement operational risk management across four pillars: 1) active oversight from Board of Commissioners and Board of Directors; 2) sufficient risk management policies/procedures and risk limits; 3) adequacy of identification/measurement/monitoring/control processes and risk MIS; 4) internal control. - OJK performs offsite (monthly/quarterly/six-monthly) and onsite assessments; RBBR semi-annual assessments incorporate ICAAP input. - EC2 (Board approval and oversight): - Regulations require BoC approval of ORMF; BoD develops elements and BoC reviews/approves. - OJK receives semi-annual ROC reports, integrates them into RBBR assessments; onsite assesses BoC oversight annually per supervisory guidelines (Annex III of SEBI No.13/36/INTERN). - EC3 (implementation and integration into bank processes): - Banks use Loss Event Data Management (LEDM) to record losses, potential losses, or near misses; OJK requires submission of operational loss data to calculate RWA. - Supervisory tools include RCSA, risk mapping, KRI, scorecards, event analysis, frequency matrix, quantitative and qualitative methodologies. - RBBR frequency: twice a year at six-month intervals; determines SAP and prioritization of operational risk. - Findings: strong emphasis on IT/cyber risks and IT specialists support; non-IT operational risk elements need greater supervisory attention—coverage, frequency, and depth are weaknesses. - EC4 (BCP/DR): - Banks required to implement disaster recovery (DR) and business continuity plans (BCP) under SEOJK No. 34/SEOJK.03/2016; OJK assesses BCM including policy approval by BoD, involvement in business impact analysis, effective communication, periodic testing with reporting to management, coverage of outsourced systems, sufficient Disaster Recovery Center (DRC), and monitoring/follow-up of testing. - COVID-19 disruption: banks demonstrated considerable resilience and continuity of services. - EC5–EC6 (IT risk, cyber, MIS for operational risk): - POJK No. 11/POJK.03/2022 mandates IT governance and IT risk management; SEOJK 29/SEOJK.03/2022 addresses cyber resilience and security. - OJK has an extensive team of IT risk specialists; supervisory activities include vulnerability assessment/penetration testing and scenario testing. - LEDM tool mandated to capture loss events; OJK assesses MIS adequacy via supervisory manual (Annex III of SEBI No.13/36/INTERN). - Assessors note implementation but recommend greater attention to effectiveness of loss collection tool and linkage with RAS and dynamic ORMF changes. - EC7 (reporting to supervisor on operational risk developments): - SEOJK No. 34/SEOJK.03/2016 requires banks to submit incidental reports that may impact financial condition; specific reporting requirements for fraud, IT incidents, and cyber incidents. - Cyber incidents must be reported within 24 hours of identification; other material issues within five days. Guidance for materiality is not specific and allows judgment. - Notification process seen to be working effectively with regular communications. - EC8 (outsourcing risk management): - POJK No. 9/POJK.03/2016 prescribes outsourcing risk management requirements; SEOJK No.12/POJK.03/2021 requires outsourcing plans in Banks Business Plan (RBB). - Outsourcing assessment covers four pillars consistent with EC1: BoC/BoD oversight; written policies/procedures; identification/measurement/monitoring/control and MIS; internal controls. - Contracts must include ‘right to audit’ and contingency planning; OJK receives ex post reports on outsourcing changes and problems; internal audit reports submitted semi-annually support supervisory assessment. - Regulation details articles: Article 7 (due diligence), Article 10 (scope of agreement including contingency plan), Article 11 (four-pillar assessment), Article 14 (written policies/procedures), Article 15 (risk identification/measurement/monitoring), Article 16 (internal control). - Assessment of Principle 25: Largely Compliant. - Comments: comprehensive regulations and strengthened IT risk assessment capacity; need for additional traditional operational risk specialists; non-IT operational risk coverage, frequency, and depth could be strengthened; supervisors should enhance challenge to banks' risk management units and increase intensity of supervisory attention to ensure ORMFs fully integrated into banks' risk management. ### Internal control, internal audit, financial reporting and external audit (Principles 26–27) - Principle 26 — Internal control and audit - EC1 (internal control frameworks): - POJK 18/POJK.03/2016 and SEOJK 35/SEOJK.03/2017 require internal control frameworks commensurate with size, scale, and risk profile; account reconciliation, segregation of duties, safeguarding assets, and prevention/detection/reporting of misuse. - Regulations stipulate Board responsibility to establish and oversee internal control framework. - EC2 (balance of skills in back office and control functions): - SEOJK 35/SEOJK.03/2017 and SEOJK 34/SEOJK.03/2016 require adequacy of human resources and expectation of skilled internal control, compliance staff, and financial controllers. - Onsite examinations assess balance of skills/resources across three lines of defense. - EC3 (compliance function independence and resources): - POJK 46/POJK.03/2017 requires a director in charge of compliance and a compliance work unit; independence achieved via three lines of defense; BoD and BoC responsibilities spelled out. - OJK assesses compliance functions through meetings and at least annual onsite examinations; oversight by BoC assessed. - EC4–EC5 (internal audit independence, resourcing, methodology): - POJK 1/POJK.03/2019 requires independent, permanent internal audit function; dual reporting to CEO and BoC; internal audit staff competencies, continuous professional development, and independence requirements. - OJK meets internal audit at planning and conclusion of audit cycle; receives IA reports throughout supervisory cycle; effective assessment of IA observed. - Internal audit governance checks include organizational structure, charter, resources, audit plan and methodology, external review every three years, and authority over outsourced functions. - Assessment of Principle 26: Compliant. - Comments: OJK regulations and supervisory processes require adequate internal control frameworks, separation of duties, reconciliation, safeguarding assets, and adequate independent internal audit and compliance functions. OJK demonstrates effective assessment practices. - Principle 27 — Financial reporting and external audit (selected ECs) - EC1: Board and management responsibility for financial statements and recordkeeping: - POJK 37/POJK.03/2019: “Management and Board of Commissioners are responsible for the completeness and accuracy of bank's reports which include financial statements.” - Banks must prepare financial statements according to Indonesia Accounting Standard (PSAK) aligned with IFRS. - EC2: Independent external auditor’s opinion and audit standards: - POJK 37/POJK.03/2019 requires audited annual financial statements; appointment of external auditor nominated by Audit Committee and ratified at GSM. - Audits conducted in accordance with Indonesia Professional Standards on Auditing (adopted from International Standards on Auditing). - Article 1 of POJK 37 lists published reports and Article 2 lists disclosure frequencies: monthly, quarterly, and annually. - EC3: Valuation practices and fair value: - No prudential valuation adjustments issued by OJK; banks follow IFRS accounting framework (IFRS 13) for fair value measurement; regulatory returns use the same accounting values. - OJK validates financial statements via offsite surveillance and onsite examinations; sample testing of credit portfolios and market risk valuation practices performed during onsite. - EC4: Scope of external audits and standards: - POJK No.9 2023 Article 10 paragraph 1: audit scope is based on agreement between bank and KAP, with further scope stipulated in a Financial Services Authority Circular Letter. - OJK Circular Letter 36/2017 Part 3 sets minimum audit scope requirements, including minimum sampling 70 percent of each financial asset class and minimum scope of 25 percent largest debtors, loan loss provisioning, asset quality, ORE foreclosed, related party transactions, RWAs, MCR computation, derivatives, NOP, and MIS reliability. - OJK meets external auditors twice per year: prior to finalizing audit scope and after external audit completion but prior to finalization of published audited accounts. - Banks required to appoint auditors with capabilities appropriate to transaction complexity; auditors apply Indonesia Professional Standards on Auditing to ensure PSAK application. *Source: Appendix 1, II.C.3.c.(2).l, extracted pages and sections of the provided IMF assessment document.* ### Chapter IX of the above regulations sets out the communication requirements of public ### Chapter IX — Communication requirements of public accountants and auditing firms with the OJK ### Communication and external audit scope (EC5, EC8, EC9) - Public accountants and public accounting firms that provide external audit services for banks and other financial service institutions must be registered with the OJK (see POJK no.9 of 2023 Article 16 paragraph 1). - Assessors saw evidence of communication with OJK when preparing and conducting financial audits of financial services institutions (Article 19). - Communication between OJK supervisors and auditor is conducted before the audit field work which helps the auditor to have better risk audit planning. - OJK circular letter 36/2017 paragraph 3: the external audit scope must address the following as a minimum: - a. 70 percent of each type of financial assets—the definition of financial assets is contained within the asset quality regulations - b. loan classification and regulatory provisions - c. Collateral for foreclosure value - d. Valuations of the asset types across the 9 categories - OJK regulation has added audit scopes including: - minimum sampling 70 percent of each financial asset - the compliance of asset quality - valuation of forborne asset - valuation of other assets - the fairness of related party transactions - legal lending limit - the calculation of risk weighted asset - spot and derivatives transaction - forex net open position - the reliable of MIS for financial report - OJK may add any additional scope during communication with the auditor; assessors saw evidence of OJK’s ability to enforce the scope of audits to cover additional items via engagement with external audit firms throughout the supervisory cycle. - Indonesia Professional Standards on Auditing 300 emphasizes the need of communication between auditor and regulator in the process of audit planning. - OJK is authorized to meet with external auditors to discuss their report without the approval of the bank; Article 34 POJK No.9 of 2023 requires external auditors to communicate with OJK to prepare and conduct audits of annual historical financial information for banks. - Contact between OJK and external auditors can be formal and informal and can occur at any time, including when the external auditor discovers a problem in carrying out their duties. - Article 36 paragraph (4) POJK No.9 of 2023: the external auditor is obliged to submit incidental reports if there is information regarding: - significant violations of the provisions of laws and regulations committed by bank - significant weaknesses in controlling the process of preparing and presenting bank financial statements - significant weaknesses in bank internal controls - conditions or forecasts of conditions that could jeopardize the continuity of the bank’s business - Example significant violations and significant weaknesses regulated in SEOJK 36/SEOJK.03/2017 concerning Procedures for Using Public Accountant and Public Accounting Firm Services in Financial Services Activities. - As stipulated in POJK N0.9 of 2023, public accountant and auditor are required to report any material significance findings within 3 days (see Article 36 and Article 37). - Regulations state that Public Accountants and Public Accounting Firms are entitled to Protection based on Article 24 of Public Accountant Law (Law No. 5 year 2011). - EC8 is fully met. ### Auditor independence, appointment, and rotation (EC6, EC7) - The OJK does not have the explicit power to reject and rescind the appointment of an external auditor. It does have the power to request auditor replacement or re-audit if the supervisor indicates the auditor is not independent or not capable. - Post completion of the audit, OJK supervisors have the power to ask for auditor replacement if there is a material miss-statement (see POJK N0.9 of 2023). - MoF licenses public accountants (External Auditors- EA’s); then EA’s need to be registered with the OJK before providing audit services to a bank—OJK’s registration process verifies documentation (e.g., no court actions, EA isn’t subject to bankruptcy proceedings). - Assessors found the absence of an explicit power to reject and rescind appointment did not impact OJK’s ability to influence appointment or rejection of an auditor when issues were identified. - Audit rotation follows the Ethic Code issued by International Ethics Standards Board for Accountants: - engagement partner: cumulative 7 years with 5 years of cooling off - engagement quality review: cumulative 7 years with 3 years of cooling off - other key audit partners: cumulative 7 years with 2 years of cooling off - Banks restrict use of audit services on annual historical financial information from the same external auditor. - OJK rotation provisions are harmonized with the Public Accountant Professional Code of Ethics adopted from the Handbook of The Code of Ethics for Professional Accountants 2018 edition (IESBA—IFAC) and Government Regulation Number 20 of 2015 concerning the Practice of Public Accountants. - OJK demonstrated awareness of the need to rotate auditors and audit firms and the separation between consulting and audit services. ### Supervisor’s enforcement and practical outcomes - OJK can request additional audit scope and can ask for replacement or re-audit where independence or capability concerns exist despite not having explicit statutory power to rescind appointments. - OJK involvement in registration of auditors provides a vetting mechanism prior to appointment. - The external auditor may request information from OJK regarding the bank to be audited and/or OJK can inform matters of concern to the external auditor in audit preparation and implementation. ### Assessment summary for Principle 27 - Assessment of Principle 27: Compliant - Comments: - OJK dedicates considerable attention to assessing adequacy and reliability of financial records. - Banks are required by OJK regulations to prepare financial statements in accordance with IFRS; financial statements are audited and published at least annually; banks also publish more frequent financial reports. - OJK holds boards and management fully accountable and holds external auditors accountable for verifying compliance with OJK requirements and Indonesian Accounting Standards. - OJK can enlarge or extend scope of external audit and assesses adequacy and reliability of records during onsite examination. - Deviation: OJK has not issued guidance on prudential valuation adjustments; banks follow accounting practices within the IFRS accounting framework; regulatory returns pertaining to valuations are based on accounting principles with no prudential adjustment—no differences between financial reporting and regulatory reporting. This deviation has been captured in CP10. --- ### Disclosure and transparency (Principle 28 — EC1 to EC5) - OJK Regulation POJK 37/POJK.03/2019 on Transparency and Publication of Bank Reports Requirements requires banks to periodically disclose information on a consolidated and/or solo basis. - Required information for conventional banks includes: - a. financial reports and financial performance information - b. reports on risk exposures and regulatory capital - c. reports on material information - d. reports on prime lending rates - e. other reports - Periodic disclosure timing: - monthly: banks are required to publish monthly financial reports, financial performance information, and prime lending rates on a solo basis - quarterly: banks must publish quarterly financial reports, financial performance information, and reports on risk exposures and regulatory capital on both a consolidated and solo basis - annual: annual disclosure encompasses the information mentioned in quarterly disclosure along with additional reports - Requirement that financial reports for the position of the end of December (i.e., a quarterly report and annual report) should be audited by an external auditor registered at the OJK. - Basel Pillar 3 implementation: published risk exposure and regulatory capital reports must include, at a minimum, disclosure related to regulatory capital, credit risk, market risk, operational risk, liquidity risk, legal risk, reputational risk, strategic risk, compliance risk, and corporate governance. - OJK specified disclosure formats for quantitative prudential information and requirements for qualitative information in Circular letter 9/SEOJK.03/2020 on Transparency and Publication of Conventional Commercial Bank Reports. - Comprehensive disclosure mandates for specific prudential requirements such as LCR and NSFR are included in relevant regulations. - OJK has not yet incorporated the Basel III post-crisis regulatory reforms (the “Pillar 3 disclosure requirements – updated framework” (2018)); OJK plans to fully implement Basel III post-crisis regulatory reform in 2024, including public disclosure requirements. - Responsibility and retention: - The board of directors and board of commissionaires are responsible for completeness and accuracy of published reports. - Regulations establish specific deadlines and mandate banks publish information on their websites and maintain it for a minimum of five years. - Disclosure content and quality: - OJK requires quantitative and qualitative disclosures; Indonesia has increased scope of published information and established dedicated annual corporate governance reports covering governance structure, composition of BoC and BoD, share ownership composition, and remuneration. - Banks have not disclosed information regarding ultimate beneficial owners. - Quality and consistency of disclosure vary among banks; larger banks generally demonstrate more robust disclosure practices (some annual reports exceed 600 pages), smaller conventional banks show lower reporting quality. - OJK has established minimum high-level requirements for disclosure of risk management strategies and practices, leaving room for interpretation; some banks provide only generic statements without specific details. - Disclosure of related party transactions varies; most annual reports reference PSAK No.7 definitions but not OJK’s broader requirements. - OJK should consider providing more comprehensive guidance to enhance transparency and comparability. - Enforcement and supervision (EC4): - OJK reviews and enforces compliance with disclosure standards; off-site supervisors review banks’ financial report publications alongside data submitted to OJK using a checklist. - Some reports are submitted via APOLO, which monitors accuracy of report submissions. - Scope and intensity of checks for qualitative information appear insufficient given variation in consistency among banks. - OJK’s enforcement powers include: - a. Administrative sanctions in the form of a written warning - b. Administrative sanctions involving the payment of fines - c. Downgrading the soundness rating of the bank (specifically, governance rating) - d. Suspending the issuance of new products or activities - e. Freezing certain business activities - In practice enforcement is rarely put into action: based on data from 2020 to 2023, there are four banks subject to supervisory letters and seven banks subject to fines. - Recommendation: prioritize review of qualitative disclosures and effectively enforce compliance with disclosure standards. - Public information on aggregate banking system (EC5): - OJK regularly publishes comprehensive statistical information about individual banks and the banking system on its website every month. - Quarterly: OJK releases the “Indonesia Financial Sector Development” report with high-level banking sector information (ratios on loans and deposits, profitability, capital and major risks, credit growth indicators). - Annual: Annual Banking Sector Booklet provides comprehensive overview. - OJK website contains detailed information about individual banks (composition of BoC and BoD, headquarters’ addresses, website links). ### Assessment summary for Principle 28 - Assessment of Principle 28: Largely Compliant - Comments: - OJK has improved standards of transparency and disclosure and implemented Basel Pillar 3 requirements. - Indonesian banks publish comprehensive information on websites; annual reports contain financial and qualitative information about risk management and corporate governance. - Consistency of public information is an issue, particularly risk management strategies/practices and related party transactions. - OJK should implement a structured process for public disclosures and enforce compliance to raise disclosure quality. --- ### Abuse of financial services; AML/CFT supervision (Principle 29 — EC1 to EC5) - Legal and supervisory framework (EC1): - AML Law Number 8 Year 2010 specifies duties and responsibilities of the Indonesian FIU (PPATK) and other supervisory authorities, including OJK. - OJK Law Number 21 Year 2021 and FSOL 2023 detail OJK responsibilities and powers; OJK is mandated to regulate and conduct prudential and AML/CFT supervision of banks and other financial institutions. - OJK Regulation No. 23/POJK.01/2019 as amended by OJK regulation No. 8 Year 2023 and SEOJK 32/SEOJK.03/2017 concerns Implementation of Anti-Money Laundering and Counter-Terrorism Financing Programs in the Financial Services Sector and requires BoD, BoC and all related parties to be actively involved. - Article 81 of OJK Regulation 8/2023: OJK must carry out risk-based supervision and monitoring and ensure compliance with AML, CFT and Counter Proliferation Financing (CPF) programs by financial institutions; requires directors, commissioners, and all related parties to be actively involved. - OJK issued guidance specifically for Banking Sector as stipulated on 32/SEOJK.03/2017. - OJK issued updated corporate governance regulation 17/POJK.03/2023 in September 2023 and has regulations on Fit and Proper Tests (27/POJK.03/2016) and Reassessment (34/POJK.03/2018). - OJK Regulation No. 39/POJK.03/2019 concerning Implementation of Anti-Fraud Strategy for Commercial Banks aims to minimize fraud and strengthen internal control. - The FATF conducted an MER of Indonesia in 2023; Indonesia became a member of FATF as of October 25, 2023. - Adequacy of bank policies, procedures, and reporting (EC2, EC3) - Article 3 of OJK Regulation 8/POJK.03/2023 requires Financial Institutions to implement AML, CFT and CPF programs effectively considering ML, TF, and/or PF risks and business characteristics, including: - active supervision of the BoD and BoC - policies and procedures - internal control - management information system - human resources and training - Banks are required to have a Special Work Unit for AML/CFT, headed by the director in charge of compliance, and to have policies and procedures adjusted to the level of risk. - OJK supervisors receive banks’ policies and Heads of Compliance regularly provide compliance reports; on-site examiners check compliance during annual on-site examinations. - Banks must analyze transactions that do not match customer profiles and have MIS to identify, analyze, monitor, and report transaction patterns. - Banks are required to report suspicious financial transactions, cash financial transactions, and cross-border fund transfer transactions to the PPATK as stipulated on Art. 76 of POJK Number 8/2023. - MER 2023 recommended fuller risk-based supervision; OJK enacted RBS guidance for banks and other intermediaries. - Banks submit STRs to PPATK, but these are not reported to OJK; STRs can be reviewed during on-site inspections by OJK. - OJK Regulation 39/POJK.03/2019 Article 9 and Article 12: in event of fraud incident with significant impact, bank must submit a report and/or correction to the Fraud report with significant impact no later than three working days after becoming aware. - There is no explicit requirement for banks to report to OJK suspicious activities of fraud when material to safety, soundness, or reputation. - Supervisor reporting and information sharing (EC4) - Article 23 of the AML Law: banks required to report suspicious financial transactions, cash financial transactions, and cross-border fund transfer transactions to the PPATK. - Article 32 of AML Law: if supervisory agency discovers suspicious transactions not reported by bank to PPATK, these agencies must immediately submit findings to PPATK. - Article 33 of AML Law: supervisory and regulatory agencies are obliged to notify PPATK of activities or transactions they know or reasonably suspect involve money laundering. - Customer due diligence and CDD program requirements (EC5) - OJK Regulation 8/POJK.03/2023 prescribes requirements for CDD policies, processes, and beneficial owners; Article 17 requires banks to have written policies and procedures (may include flowcharts and explanations) for AML, CFT and CPF implementation including: - identification and verification of the Customer - identification and verification of Beneficial Owners - rejection of transactions and closure of business relationships - sustainable ML, TF, and/or PF risk management for customers, countries, products, services and delivery channels - maintenance of accurate data related to transactions, administration of CDD processes, administration of policies and procedures - updating and monitoring (due diligence on an ongoing basis) - reporting to senior officials, the BoD and the BoC on implementation of policies and procedures - reporting to the PPATK - Articles 24–25: banks must identify and classify prospective customers, WIC and customers into groups and collect customer data including identity, identity of beneficial owner, source of funds, income information, purpose and objectives of business relationship or transaction. - Article 49: financial institutions must refuse business relationship/transaction if prospective customer does not comply with CDD provisions, is suspected of using fake documents, is a shell bank, has source of funds known or reasonably suspected to originate from proceeds of a crime, or contained in TF and/or PF list. - Article 51: banks required to monitor business relations and customer transactions to ensure alignment with customer profiles and risk assessments. - Article 52: bank required to conduct analysis of all transactions that do not conform to customer transaction profiles, characteristics, and/or habits. - Article 35: banks required to implement Enhanced Due Diligence (EDD) measures for high-risk customers (including politically exposed persons). - Article 37: banks required to appoint a senior official who has the authority to: (text provided ends at this point). ### Key procedural timing and retention requirements - External auditors required to report material significance findings within 3 days (Article 36 and Article 37 POJK No.9 of 2023). - Fraud with significant impact: bank must submit report or correction no later than three working days after becoming aware (Article 12, OJK Regulation 39/POJK.03/2019). - Banks must maintain published information on websites for a minimum of five years. - Rotation durations: cumulative 7 years with cooling-off periods of 5 years (engagement partner), 3 years (engagement quality review), and 2 years (other key audit partners). - Enforcement outcomes 2020 to 2023: four banks subject to supervisory letters and seven banks subject to fines. - Some larger banks’ annual reports exceed 600 pages. *Source: Chapter IX of 1idnea2024004-print-pdf (POJK regulations, OJK circulars, and related assessments included in the provided content).* ### 1. Give approval or rejection of opening a business relationship with a prospective ### 1. Give approval or rejection of opening a business relationship with a prospective ### Decision-making on opening, continuing or terminating relationships - Banks must give approval or rejection of opening a business relationship with a prospective customer, or beneficial owner and/or a high-risk customer, WIC, or beneficial owner transaction, including politically exposed persons. - Banks must make a decision to continue or terminate the business relationship and/or transaction with the customer, WIC, or beneficial owner which includes high-risk criteria, including politically exposed persons. - Regulations are silent on whether banks have an obligation to develop and establish a customer acceptance policy that identifies business relationships that the bank will not accept based on identified risks. ### Record keeping and documentation requirements (Article 63) - Banks are obliged to administer (conduct record keeping) documents related to: - (1) data of prospective customers, customers, and/or WIC as result of CDD measures with a minimum period of five years include identity; - (2) customer or WIC documents related to financial transactions with a period of ten years. - Documents related to data on prospective customers, customers, and/or WIC that must be administered include: - (1) identity of prospective customer, customer, and/or WIC including supporting documents; - (2) transaction information; - (3) the results of the analysis that has been carried out; - (4) correspondence with the customer or WIC; and - (5) other documents, if needed. - Banks are required to keep records and documents regarding the entire process of identifying suspicious transactions in accordance with statutory regulations. ### Training, internal controls, MIS and internal audit - Article 72 requires banks to provide training on AML, CFT and CPF to officials and/or employees. Training materials include policies and procedures for implementing the AML, CFT and CPF programs and roles and responsibilities of employees in preventing and eradicating ML, TF, and/or PF. - Article 65 of OJK Regulation 8/POJK.03/2023 requires banks to have an effective and independent internal control system to prevent, identify and report potential abuses of financial services, including money laundering and the financing of terrorism. - Article 69 requires banks to have a management information system that can effectively identify, analyze, monitor, and provide reports regarding the characteristics or patterns of transactions made by customers. - Article 65 (OJK Regulation 8/POJK.03/2023) requires independent evaluations of relevant risk management policies, processes and controls by internal audit. - Article 14 requires banks to establish a Special Working Unit responsible for receiving, performing analysis, and preparing reports on suspicious transactions and/or cash financial transactions submitted by work units. - Article 72 regulates pre-employee screening and "know your employee" monitoring across staff levels up to BoD and BoC; Article 71 requires training at least once in one year. ### Correspondent banking (EC6) - Banks must gather sufficient information about respondent banks to understand the nature of their business and customer base, and how they are supervised. - Banks must not establish or continue correspondent relationships with banks that do not have adequate controls against criminal activities, are not effectively supervised, or are shell banks. - Required information before providing cross-border correspondent services includes: - (1) profiles of prospective recipient banks and/or intermediary banks; - (2) reputation of recipient banks and/or intermediary banks based on information that can be accounted for; - (3) level of implementation of the AML, CFT and CPF programs in the country where the recipient bank and/or intermediary bank are domiciled; - (4) other relevant information needed by commercial banks. - Banks are required to: - (1) appoint senior officials responsible for business relations with prospective recipient banks and/or intermediary banks; - (2) evaluate the implementation of AML, CFT and CPF programs at recipient/intermediary banks; - (3) understand responsibilities for implementing AML, CFT and CPF programs of each party in cross-border correspondent banking activities. - When a customer has access to a payable through account, the sending bank must ensure: - (1) recipient/intermediary banks have carried out an adequate CDD process for the customer, including having direct access to the customer's account; - (2) recipient/intermediary banks are able to provide related or relevant CDD data and/or information if requested by sending banks. - Sending banks providing cross-border correspondent banking services must: - (1) document all cross-border correspondent banking transactions; - (2) refuse to deal with and/or continue the cross-border correspondent banking relationship with the shell bank; - (3) ensure recipient/intermediary banks do not allow their accounts to be used by shell banks. - MER 2023 findings: - No explicit requirement to gather information on whether the respondent institution has been subject to an ML/TF investigation or regulatory action. - Banks are not explicitly required to obtain senior management approval before establishing new correspondent relationships. - OJK response: - OJK Regulation 8/2023 requires banks to gather information and examine whether the respondent institution has a negative reputation and requires banks to appoint senior officials responsible for correspondent banking, including approval of a new correspondent relationship (Article 54, para 3). ### Supervisory powers and sanctions (EC8) - OJK has adequate powers to take actions against banks that do not comply with AML, CFT, CPF obligations. - Administrative sanctions for violations include: - a written warning or warning accompanied by an order to take certain actions; - fine with a maximum of 5 five billion rupiah per year for individuals and/or a maximum of one percent of the previous year's total net profit with a maximum limit of one hundred billion rupiah per year for a Bank; - restrictions on certain business activities; - decrease in the assessment of the forming factors of the soundness level; - freezing of certain business activities; and/or - prohibition as the main party. - OJK can announce the imposition of administrative sanctions to the public; imposition does not erase the bank's obligation to continue implementing obligations. - FSOL 2023 provided stronger power for OJK by giving authority to conduct investigations into crimes in the banking sector. - MER 2023 findings and OJK action: - MER 2023 found maximum financial sanctions are not dissuasive for larger institutions and sanctions do not always explicitly apply to all financial institutions; recommended full use of sanctioning powers. - OJK enacted OJK Regulation 8/2023 increasing the maximum amount of fines for AML, CFT, CPF violations (other than reporting) to strengthen sanctions: - maximum of 5 billion Rupiah (approximately 312 500 Euro) per year for individuals and a maximum of 100 billion Rupiah (6.25 million Euro) (Article 71, OJK Regulation 8/2023). ### Reporting, fraud management and whistleblower protections (EC10 and EC11) - OJK regulation 39/POJK.03/2019 requires banks to establish multiple reporting channels (telephone, mail, electronic mail, facsimile) and an effective fraud reporting system with clear reporting processes, facilities, and parties responsible for handling reports; supported by a clear follow-up mechanism. - Article 5 requires fraud risk management to include active supervision by BoD and BoC, policies and procedures, organizational structure and accountability, and control and monitoring. - Article 28 of AML Law states that unless there are elements of abuse of authority, the reporting party, official, and its employees could not be prosecuted either civil or criminal upon implementation of report obligation in accordance with this law. - OJK Regulation 39/POJK.03/2019 stipulates whistleblower system accessibility for employees and potential extension to customers, confidentiality of reporter identity, possible anonymous reporting, and potential rewards for proven reports. ### Cooperation, information sharing and supervisory resources (EC12 and EC13) - Collaboration mechanisms: - Reports on implementation of supervision by OJK and other Supervisory and Regulatory Agencies submitted to PPATK. - OJK and other agencies must immediately report suspicious financial transactions not reported to PPATK. - OJK and other agencies are obligated to inform PPATK regarding every activity related to AML/CFT. - Regional dialogue sessions on AML/CFT involving PPATK, law enforcement, Foreign Affair Ministry, BI, OJK and selected reporting parties. - Bilateral meetings between OJK and PPATK, OJK and KPK, OJK and national police. - Cooperation and Coordination Forum of the Financial Service Sector with representatives from banks, stock market and non-banks for coordination and drafting regulations/SOPs. - OJK has MOUs with PPATK and KPK since 2013; MoU with FIU updated in 2019. Main coordination includes regular supervisory coordination and regular information exchange; joint on-site inspections have been conducted. - Assessors recommend quarterly coordination meetings between OJK and PPATK to enhance information exchange; OJK can benefit from access to more information from PPATK. - OJK in-house resources: - OJK AML/CFT Group responsible for coordination, regulation and monitoring across financial sectors. - Investigation Department with expertise in financial criminal activities. - AML/CFT specialists in the Banking Supervision Department. - OJK regularly provides Certified Anti-Money Laundering Specialist (CAMS) training and information through SIGAP and OJK AML/CFT “minisite.” ### Key MER 2023 findings and outstanding shortcomings - Positive findings: - Country has a good understanding of risks and developed risk-based policies and strategies. - Robust domestic inter-agency coordination and cooperation; good international cooperation. - Shortcomings noted in MER 2023: - Need to fully conduct supervision based on risks despite advanced RBS framework. - Need to make full use of sanctioning powers and respond to regulatory violations with proportionate and dissuasive sanctions. - CDD/UBO weaknesses: - No risk assessment requirement for simplified due diligence; - Lack of consistent definition of beneficial owner and therefore requirements to identify beneficial owners and verify identities, including for legal persons. - Need to improve industry knowledge on terrorist financing risks. - OJK actions addressing MER recommendations: - Enactment of OJK Regulation 8/2023 which regulates FI’s obligation to conduct risk assessment for simplified due diligence (Article 45) and to ascertain the definition of a beneficial owner in line with FATF recommendations (Article 1, point 21). - Steps to increase supervisory use of sanctioning powers. ### Assessment summary (Principle 29) - Assessment: Largely compliant. - Comments: - OJK has regulatory and supervisory framework to prevent, identify and report possible abuses of financial services and assesses compliance via on-site inspections and off-site reviews. - OJK has MoU with PPATK on information exchange, on-site inspections, and coordination; closer cooperation with PPATK would strengthen OJK’s supervision, including more regular (quarterly) and granular information sharing. - Certain regulatory shortcomings remain: - Silence on obligation for banks to develop customer acceptance policy excluding relationships based on identified risks. - No explicit requirement for banks to report to OJK suspicious activities of fraud when there is material to safety, soundness and reputation of the bank. - OJK is taking steps to implement MER recommendations, including on CDD/Ultimate Beneficial Owners; Indonesia became a member of FATF as of October 25, 2023. *Source: 1idnea2024004-print-pdf - 1. Give approval or rejection of opening a business relationship with a prospective* ### 1. Responsibilities, objectives ### 1. Responsibilities, objectives and powers ### Mandate, objectives, and legal framework - OJK is responsible for microprudential banking supervision; responsibilities, objectives, and powers defined in the OJK Law and Banking Law. - A suitable legal framework is in place but has shortcomings: - Primary legislation lacks a provision that provides a clear definition of OJK’s mandate to promote the safety and soundness of individual banks and the banking system. - The safety and soundness mandate must be translated at the operational level, particularly in determining OJK’s risk tolerance. - Primary legislation has not established the hierarchy of OJK’s multiple objectives; development and other goals should be subordinated to the primary objective and not conflict with it. - In practice, OJK prioritizes the safety and soundness mandate. ### Independence, accountability, resourcing, and legal protection Findings: - Operational independence, accountability, and governance are prescribed in legislation and publicly disclosed. - FSOL 2023 includes provisions for legal protection for the supervisor but significant shortcomings remain, especially regarding independence. - An ex-officio member of the Ministry of Finance (Vice Minister) sits on the Board of Commissioners (BoC), which could lead to political interference and a conflict of interest for state-owned banks. - FSOL 2023 introduced that OJK’s budget will be part of the State Budget; this may limit budgetary flexibility and autonomy and create risks from reliance on Government financing. - Requirement to disclose reason(s) for removal of Commissioners is not explicitly and clearly provided in primary legislation; in practice Presidential decrees of removals are typically published. - FSOL 2023 introduced legal protection for OJK staff but is silent on the costs of defending supervisors’ actions made in good faith. - Need for more accountability and transparency on how the safety and soundness mandate is delivered and for disclosure of the supervisory framework and policies. - Need to further develop capacity, skills, and innovative technologies and secure sufficient budget for effective banking supervision. - Challenges in recruiting and retaining skilled resources, particularly risk specialists; salary scales for these groups need to be competitive. Recommendations: - Clarify OJK’s independence safeguards and remove or mitigate structures that create potential conflicts of interest (e.g., ex-officio membership). - Ensure OJK has sufficient budgetary flexibility even if its budget is part of the State Budget. - Explicitly provide primary‑law protections on grounds and procedures for removal of Commissioners, and on costs of legal defence for supervisors acting in good faith. - Increase transparency on supervisory frameworks, policies, and how the safety and soundness mandate is operationalized. - Invest in capacity building, competitive remuneration for specialists, and innovative supervisory technologies. ### Cooperation and information sharing Findings: - OJK Law and MoUs provide framework for cooperation with domestic authorities (BI, LPS, FIU) and foreign supervisors. - MoUs established with nine foreign supervisory authorities where material cross-border operations exist; not all foreign supervisors have MoUs. - In absence of MoU, jurisdictions may face limitations transmitting confidential information. Recommendation: - Expand formal MoUs with relevant foreign supervisors to reduce barriers to confidential information exchange. ### Permissible activities and licensing Findings: - Permissible activities are clearly defined; the term “bank” is controlled. - OJK has established licensing criteria and power to reject applications; no new bank license applications in the last five years. - Shortcomings: - OJK lacks explicit authority to reject an application during licensing if the proposed legal, managerial, operational, and ownership structures hinder effective supervision or corrective measures in future. - Room to strengthen fit and proper criteria. Recommendation: - Amend regulations to give OJK explicit authority to refuse licenses where structures would impede effective supervision and to strengthen fit and proper tests. ### Transfer of significant ownership and major acquisitions Findings: - OJK can review, reject, and impose prudential conditions on transfers of significant ownership or control, including beneficial ownership. - Over the past five years, OJK received 21 requests related to share ownership transfers. - Regulatory shortcomings: - No explicit requirement to notify OJK of material information that may negatively affect the suitability of a major shareholder or controlling party. - Definitions of “controlling shareholder” and rejection conditions do not explicitly mention the ultimate beneficial owner; fit and proper test exists for ultimate shareholders. - No separate definition of “significant ownership”; included in “controlling shareholder” (ownership of equal or more than 25 percent). - OJK faces challenges obtaining ultimate beneficial owner information from some large foreign banks; has contacted home supervisors to gain information. - OJK has not exercised powers to modify, reverse, or otherwise address changes of control that occurred without necessary notification or prior approval; room for clarification of application of these powers. Findings on major acquisitions: - OJK can approve/reject and impose prudential conditions on major acquisitions or investments; recently received numerous local large bank acquisitions of smaller banks. Recommendations: - Require explicit notification of material information affecting suitability of major shareholders. - Clarify definitions to explicitly capture ultimate beneficial owners and define “significant ownership.” - Strengthen enforcement capability to address unnotified or unauthorized changes of control. ### Supervisory approach, techniques, and tools Findings: - Risk methodology is well structured; six-point supervisory cycle starting with “know your bank”; frequent risk assessments and annual on-site examinations. - Supervisors gather comprehensive information; quantitative analysis highly developed. - OJK is transitioning to implement a recovery framework for all banks. - Shortcomings: - 105 banks’ ratings are in the middle two of five possible ratings; methodology and application need enhancement to be more risk sensitive and better discriminate riskiness based on sufficient evidence. - Need to differentiate supervisory intensity for D-SIBS (not only resource allocation). - OJK should consider transitioning from semiannual to annual rating assessments. - Gaps stem from corporate governance and risk management areas (addressed under assessments of CP14 and CP15). - Need to increase challenge to banks’ boards and senior management on assumptions in strategies, business models, stress tests, ICAAP, recovery plans; capacity building required. - Need for separate meetings with banks’ independent BoC members. - Need explicit methodology for banks’ business model analysis, particularly around sustainability. Recommendations: - Enhance risk methodology to improve risk sensitivity and discrimination; move to annual rating assessments. - Tailor supervisory intensity to bank systemic importance (D-SIBS). - Strengthen supervisor capacity to challenge boards and management; institute separate engagement with independent BoC members. - Develop explicit business-model analysis methodology including sustainability considerations. ### Supervisory reporting Findings: - OJK has comprehensive powers to collect supervisory data; frequent submissions; automatic software for data verification and validation. - Two deviations: - No specific guidance for valuation adjustments when additional conservatism is needed; banks comply with accounting rules and OJK has not required reporting adjustments for capital adequacy in practice. - No formal program for periodic verification of supervisory returns and validation of supervisory information; validation checks performed but not as a systematic program. Recommendations: - Issue guidance on valuation adjustments for supervisory conservatism and formalize authority/application of such adjustments. - Establish a formal program for periodic verification and validation of supervisory returns. ### Corrective and sanctioning powers Findings: - OJK has a sufficiently broad range of powers to act at an early stage to address unsafe or unsound practices. - Onsite examinations do not appear to sanction systematic and repeated breaches; often a case-by-case approach with fines for non-compliance. Recommendation: - Strengthen enforcement strategy to address systematic/repeated breaches rather than file-by-file fines; ensure sanctions deter recurrence. ### Consolidated supervision and home-host relationships Findings: - OJK supervises on solo and consolidated bases, monitors intra-group and related party transactions, requires oversight of foreign operations. - OJK cannot currently require banks to report information regarding non-financial and unregulated entities within the broader group structure, limiting data gathering and surveillance. - FSOL strengthens OJK’s powers to include non-financial and unregulated entities in a group. - Cross-border operations of Indonesian groups overseas are not material. - OJK has not established formal arrangements with certain foreign supervisory authorities; absence of arrangements can limit confidential information transmission. - Based on CP3 assessment handling, a full grade has been given to CP13. Recommendations: - Implement FSOL powers to require reporting on non-financial and unregulated entities to improve group-wide surveillance. - Conclude formal home-host arrangements where needed to facilitate confidential information exchange. ### Corporate governance and risk management Findings on corporate governance (CP14): - New regulation on corporate governance issued; progress made but significant shortcomings remain in evaluating governance policies and their on-site implementation. - Need to strengthen BoC role and responsibilities; OJK needs to be more proactive. - “Independent” BoC members may serve extended periods with OJK approval; executive management may migrate to BoC as “independent” after a 1 year cooling-off period. - OJK needs to challenge BoC more, hold them responsible and accountable for maintaining sound bank conditions and oversight of BoD activities. - Need for more holistic on-site inspections assessing effectiveness of BoC, committees, and control functions (risk management, compliance, internal audit), conflicts of interest, and remuneration. Findings on risk management process (CP15): - Areas for strengthening: - Assessment of a bank’s risk culture and the relationship between the three lines of defense. - Better integration of ICAAP into SREP and bank soundness assessment. - Role of stress testing: regulations not sufficiently specific to encourage better standards; room to integrate outputs into capital adequacy assessment. - Oversight of banks’ models: need for more analysis of models, model governance, model validation, and independent risk management verification. Recommendations: - Enhance supervisory focus on BoC effectiveness and control functions via deeper on-site assessments. - Tighten rules and supervisory practice on independence, cooling-off periods, and term limits for independent BoC members. - Integrate ICAAP and stress-testing outputs into SREP and capital assessments; strengthen model governance and validation oversight. - Dedicate supervision resources to assess risk culture and three lines of defense interactions. ### Capital adequacy and credit risk Findings on capital adequacy (CP16): - OJK has implemented Basel III capital framework with minimum capital ratios and buffers; higher minimum capital for systemically important banks. - Two deviations from Basel III: - Market risk: zero-risk weighting on government bonds issued in US dollar and central bank debt which is given 0 percent weight. Banks’ exposures to US denominated government securities are material. BCBS’s RCAP assessment identified this issue. - OJK issued Basel III amendments to calculating regulatory capital for market risk which will be implemented January 1, 2024. Currently, banks use the Basel II framework to calculate regulatory capital. Findings on credit risk (CP17): - Credit risk is highest priority for onsite examinations; OJK should allocate greater resources to credit risk specialists to support onsite activities. - Supervisors need to go into greater detail, adopt more of a portfolio view of credit risks and risk-taking to draw conclusions about industry standards (adequacy of credit risk management; risks of new lending vis a vis risk appetite; effectiveness of independent challenge by the 2LOD). Recommendations: - Implement Basel III market risk amendments by January 1, 2024, and remove zero-risk weighting where exposures are material. - Increase specialist resourcing for credit risk and adopt portfolio-level assessments and deeper analysis of credit risk practices across the industry. ### Problem assets, provisioning, concentration risk, and related‑party transactions Findings on problem assets and provisions (CP18): - OJK regulations set supervisory expectations and require banks to have adequate policies and processes for problem assets and provisions; OJK assesses adequacy and implementation. Findings on concentration risk and large exposures (CP19): - OJK adopted Basel large exposure standard; robust approach. - Regulations are not sufficiently specific in requiring banks to have a comprehensive bank-wide view of significant sources of concentration risk, including non-credit sources. - Legal Lending Limit and other regulations exist, but explicit requirement to measure and manage concentration risks bank-wide (and group-wide) is needed. Findings on transactions with related parties (CP20): - Enhanced requirements exist; aggregate limit set at 10 percent of total capital; OJK receives comprehensive information. - Significant shortcomings persist; regulations are not comprehensive: - Do not explicitly address certain related party groups and exclude non-credit related-party transactions. - No provisions for prior approval of write-offs of related party exposures by the BoC. - General requirement does not explicitly emphasize the arm’s length rule or specify terms (credit assessment, tenor, interest rates, fees, amortization, collateral). - Regulations do not explicitly require BoC members to be excluded from approval/monitoring of related party transactions. - Requirements governing related parties are spread across multiple regulations; consideration should be given to a dedicated regulation for transactions with related parties. - During on-site inspections, loans to related parties are reviewed if selected in sampling; OJK should give higher priority to evaluate effectiveness of banks’ policies and processes on conflicts of interest, identification of related parties, arm’s-length compliance, and BoC role. Recommendations: - Establish an explicit bank-wide requirement to measure and manage concentration risks, integrating exposures across business units and subsidiaries. - Consolidate and strengthen related-party transaction rules into a dedicated regulation that explicitly covers non-credit transactions, arm’s-length standards, prior approvals for write-offs, and BoC exclusion from approval processes. - Prioritize supervisory review of related-party exposures and governance during on-site inspections. *Source: 1. Responsibilities, objectives and powers (extracted from the provided IMF chapter content).* ### 21. Country and transfer risks MNC The OJK has adopted a risk-based approach to ### 21. Country and transfer risks MNC The OJK has adopted a risk-based approach to ### Country and transfer risks — Findings - The OJK has adopted a risk-based approach to supervision, and, as a result, country and transfer risk has been given relatively minor consideration in recent examinations. - In general, the country risk exposure of Indonesian banks is relatively limited given the domestic focus of most banks’ business models. - Regulations are not sufficiently specific to capture all the dimensions of country and transfer risk as required in this principle. - Reporting requirements are insufficient for ongoing routine analysis of country and transfer risks which are not explicitly included in offsite surveillance or onsite examinations. ### Market risk — Findings - Regulations require banks to have prudent policies and processes to identify, measure, evaluate, monitor, report and control or mitigate market risks on a timely basis. - OJK assesses the implementation of market risk management process as part of its supervisory processes. - During onsite examination, OJK conducts walkthroughs of the systems and controls to satisfy itself about the integrity of banks’ market risk policies and processes. ### Interest rate risk in the banking book (IRRBB) — Findings - Under regulations, banks must develop and implement policies and processes to identify, measure (including evaluation and validation of model), monitor (including reporting to the management and necessary actions to mitigate the risk), and control or mitigate material sources of interest rate risk in the banking book as well as the information system for risk management. - The OJK reviews the IRRBB strategy and policy framework mainly during onsite examinations. - Market risk specialists support line supervisors when needed to examine issues in greater depth. - IRRBB has been a focus of OJK supervisors given the steepening of the yield curve in 2022 and continued into 2023. ### Liquidity risk — Findings - The OJK has implemented the Basel III liquidity framework including the LCR and NSFR as well as the risk management principles. - Regulations establish a comprehensive set of minimum expectations for liquidity risk management aligning with the Basel III framework. - There is scope for OJK supervisors to examine in greater detail how banks apply LCR regulation in practice, particularly assumptions behind run off rates, analysis of segmentation of liabilities, and processes for assessing changing customer behavior. - OJK receives granular data on run-off assumptions applied to the liability stack, but more detailed analysis is needed given fast-paced digital developments and changes to banks’ business models. ### Operational risk — Findings - OJK has issued regulation providing guidance for banks to implement operational risk management. - OJK determines whether banks have an adequate operational risk management framework considering risk appetite, risk profile and market and macroeconomic conditions. - OJK has established a team of IT risk specialists to support operational risk onsite examinations, strengthening capacity for technology risks and information security (cyber). - There remains a need for traditional operational risk specialists for non-IT related operational risks. ### Internal control and audit — Findings - Banks are required to have an effective internal control system and OJK includes an assessment of controls and adequacy of internal audit in onsite examinations. - OJK engages frequently with banks’ internal audit function and receives regular reporting from this unit. ### Financial reporting and external audit — Findings - Regulations require banks to prepare financial statements in accordance with IFRS and financial statements are audited and published on at least an annual basis. - Banks must publish more frequent financial reports supporting transparency. - OJK supervisors hold the banks’ board (BoC) and management (BoD) fully accountable for producing timely and accurate financial reports. - OJK holds banks’ external auditors fully accountable for verifying that the process and reports produced by the banks comply with OJK requirements and Indonesian Accounting Standards. - OJK engages with external auditors to identify weaknesses in banks’ reporting systems and has authority to enlarge or extend the scope of an external audit. ### Disclosure and transparency — Findings - OJK has improved standards of transparency and disclosure and implemented Basel Pillar 3 requirements. - Indonesian banks have made good progress in disclosing a comprehensive suite of information on their websites, including annual reports with financial and qualitative information about risk management and corporate governance. - Consistency of public information is an issue, especially concerning risk management strategies, practices and related party transactions. - OJK should implement a structured process to public disclosures to raise standards and enforce compliance. - There is a necessity to incorporate disclosure requirements of the Basel III post-crisis regulatory reforms; OJK is planning to implement it in 2024. ### Abuse of financial services (AML/CFT) — Findings - OJK has the regulatory and supervisory framework to prevent, identify and report possible abuses of financial services such as suspicious acts of money laundering and terrorism financing. - OJK assesses banks’ compliance through onsite inspections and off-site reviews. - Closer cooperation with the FIU would strengthen OJK’s supervision of banks’ implementation of AML/CFT risk management standards; more regular and granular information sharing is recommended. - Regulatory shortcomings identified: - Regulations are silent on whether banks must develop and establish a customer acceptance policy that identifies business relationships the bank will not accept based on identified risks. - No explicit requirement for banks to report suspicious activities of fraud when these are material to safety, soundness, or reputation of the bank. - The FATF Mutual Evaluation Report (MER) of Indonesia in 2023 highlighted good understanding of risks and robust domestic inter-agency coordination, but revealed shortcomings including: - Further strengthen implementation of risk-based framework in practice. - Need to make full use of sanctioning powers and apply proportionate and dissuasive sanctions. - More focus needed on CDD/UBO: No risk assessment requirement for simplified due diligence; Lack of consistent definition of beneficial owner and related identification/verification requirements. - Need to improve industry knowledge on terrorist financing risks. - OJK is making efforts to implement MER recommendations to address shortcomings related to CDD/Ultimate Beneficial Owners. ### Recommended actions — Selected (by Reference Principle) - Principle 1: - Amend OJK Law or Banking Law to explicitly state that the OJK’s primary objective is to promote safety and soundness and that other objectives are subordinate. - Develop and issue a public statement explaining OJK’s primary objective to promote the safety and soundness of individual banks and the banking system, and OJK’s risk tolerance. - Principle 2: - Strengthen the level of independence of OJK vis-à-vis the Government, including: - Amend OJK Law to change Board of Commissioners composition without an Ex-officio Ministry of Finance member. - Find other forms of cooperation with the Ministry of Finance without an Ex-officio member. - Amend primary legislation to separate OJK budget from the State Budget. - Take actions to safeguard OJK’s autonomy in implementing the FSOL 2023 provisions for establishing the OJK Supervisory Board by specifying its composition. - Amend OJK Law to require public disclosure of reason(s) for removal of Commissioners. - Ensure legal protection for OJK and staff by amending primary legislation and preparing secondary legislation and internal procedures translating FSOL 2023 provisions on legal protection. - Improve accountability and transparency of banking supervision through additional disclosures on supervisory actions, statistics of applied sanctions, and key findings from on-site inspections; consider disclosing supervisory framework and policies on OJK website. - Ensure sufficient resources: enhance capacity, skills, technologies, allocate budget for external experts, benchmark salaries and benefits to recruit and retain talent, and introduce differentiated salary scales by unit importance. - Principle 3: - Establish MoUs for cooperation and information exchange with foreign supervisory authorities (host and home supervisors), including AML/CFT topics. - Principle 4: - Ensure the list of licensed banks is updated timely on the OJK website, improve public access, and clearly indicate that the list includes only licensed banks. - Principle 5: - Amend fit and proper criteria to require skills and experience commensurate with bank activities; assess potential conflicts of interest; ensure board collective knowledge; require proposed non-executive directors to possess independence of mind. - Specify that proposed legal, managerial, operational, and ownership structures must not hinder effective supervision on solo and consolidated bases. - Principle 6: - Provide a separate definition of ‘significant ownership’. - Require notification to OJK of material information that may negatively affect suitability of a major shareholder or controller. - Make explicit that ‘controlling shareholder’ and rejection conditions explicitly mention the ultimate beneficial owner. - Clarify powers to act when change in control occurs without necessary notification/prior approval. - Adjust periodic reporting/on-site examination requirements so foreign bank subsidiaries and branches operating in Indonesia submit beneficial ownership information to OJK. - Principle 8: - Enhance risk methodology to be more risk sensitive, discriminate riskiness, and be evidence-based. - Differentiate supervisory intensity for D-SIBs (off-site supervision, on-site examination, and prudential meetings). - Consider transitioning from semiannual to annual rating assessments. - Principle 9: - Enhance the risk-based supervisory model to integrate D-SIBs, Basel Pillar 2, Recovery framework, stress testing, and business model sustainability analysis. - Rebalance supervisory activities: establish clear priorities, conduct horizontal reviews of governance and risk control functions, develop holistic on-site inspections, consolidate on-site findings at bank-wide/sector levels. - Increase challenge to boards and senior management on assumptions in strategies, stress tests, ICAAP, recovery plans; build supervisor capacity. - Introduce regular prudential meetings with independent board members and consider using independent third parties. - Create methodology for banks’ business model analysis, particularly sustainability. - Principle 10: - Issue guidance for valuation adjustments to strengthen governance and independent verification. - Implement a program for periodic verification of supervisory returns. - Principle 11: - Establish a division within banking supervision staffed with legal and enforcement expertise to handle sanctioning and corrective measures. - Principle 12: - Implement the FSOL 2023 to strengthen OJK powers to require reporting regarding non-financial and unregulated entities within broader group structures. - Principle 14: - Continue to prioritize corporate governance and enhance supervisors’ capacity. - Strengthen Board of Commissioners (BoC) role and responsibilities: enhance fit and proper criteria for independent BoC members; challenge BoC on effective oversight; hold them accountable for bank soundness, independent checks and balances, and oversight of BoD activities. - Strengthen on-site inspection processes to assess effectiveness of corporate governance, focusing on BoC, control functions, conflicts of interest, and remuneration. - Principle 15: - Better integrate ICAAP into OJK’s assessment of material risks and the SREP. - Strengthen onsite examinations to focus on risk culture and second line of defence independence. - Enhance stress testing regulations and incorporate stress test analysis into bank soundness ratings. - Emphasize analysis of models, model governance, model validation, and role of independent risk management units. - Principle 16: - Implement market risk amendments of Basel III for calculation of risk-weighted assets. - Pursue highest level of alignment with Basel III capital adequacy standards. - Principle 17: - Adopt a portfolio view of credit risks and risk-taking to assess credit risk standards across the industry. - Dedicate more resources to credit risk specialists to support onsite examinations. - Principle 19: - Expand regulations to require banks’ risk management to consider all sources of concentration risks. - Pay greater attention to concentration risk from aggregate exposures to state owned enterprises and government bonds. - Principle 20: - Enhance requirements for transactions with related parties, including: - Enhance definitions of ‘related party’ and ‘related party transactions’ in line with Basel Core Principles. - Introduce provisions for prior approval of write-offs of related party exposures by BoC. - Establish a clear arm’s length rule specifying terms (credit assessment, tenor, interest rates, fees, amortization schedules, collateral). - Require BoC members to be excluded from approval of related party transactions. - Conduct horizontal reviews to check effectiveness of implementation. - Principle 21: - Strengthen regulations for country and transfer risk to be more specific in terms of risk management requirements. - Enhance reporting requirements to obtain more frequent reporting from banks of country and transfer risks. - Increase supervisory focus on country and transfer risks. - Principle 24: - Dedicate greater attention to analysis of segmentation of deposit liabilities and estimation of run-off assumptions in the LCR calculation. - Principle 25: - Increase risk specialist resources for traditional operational risk areas. - Enhance attention to non-IT operational risks. - Principle 28: - Incorporate disclosure requirements of the Basel III post-crisis regulatory reforms “Pillar 3 disclosure requirements—updated framework.” - Take supervisory actions to increase banks’ quality of disclosure of qualitative information, especially on risk management strategies, practices, and related party transactions. - Principle 29: - Increase frequency of engagement with the FIU and leverage FIU data. - Establish regulatory requirements for banks: - Obligation to develop and establish a customer acceptance policy identifying business relationships the bank will not accept based on identified risks. - Banks should report to OJK suspicious activities of fraud when material to safety, soundness, or reputation. - Continue to implement MER recommendations to remain compliant with FATF standards, including strengthening risk-based supervision of AML/CFT, making full use of sanctioning powers, prioritizing CDD/UBO in on-site inspections, and improving industry knowledge on terrorist financing risks. *Source: IMF staff assessment as presented in the supplied chapter content.* ### 85. Otoritas Jasa Keuangan (OJK) expresses its sincere gratitude to the IMF-World Bank mission ### Otoritas Jasa Keuangan (OJK) response to IMF-World Bank assessment of Indonesia’s banking system (BCP / FSAP) ### Acknowledgement and overall assessment - OJK expresses "sincere gratitude" to the IMF-World Bank mission led by Mr. Ranjit Singh, Mr. Ilias Skamnelos, Mr. Christopher Wilson, and Ms. Aldona Jociene for completing an assessment of Indonesia’s banking system with the Basel Core Principles for Effective Banking Supervision (BCP). - The Basel Committee on Banking Supervision agreed to revisions to the Basel Core Principles in the meeting on February 28–29, 2024, which was right after completion of the current Indonesian FSAP. - OJK "welcomes the overall conclusion of the assessment" confirming Indonesia’s level of compliance with the BCP and "the substantial progress" made since the previous FSAPs (last FSAP conducted in 2010). - OJK notes that conducting a BCP assessment "in light of the recent global banking turmoil is somewhat challenging." ### Independence, accountability, resourcing, and legal protection for supervisors - OJK acknowledges issues raised regarding independency, accountability, resourcing, and legal protection for supervisors. - OJK asserts: "There is no evidence, past or present, of any interference from Government or Industry that compromises OJK’s operational independence." - Legal and budgetary safeguards cited: - OJK’s independence regulated in the FSOL 2023 and other provisions. - The state budget allocated to OJK is separated from the rest of the state budget and used only for specific or targeted needs (e.g., fixed assets and IT investments) not financeable through levies from the industry. - "Therefore, the Ministry of Finance cannot interfere in OJK’s operational activities." ### Corporate governance and board structure - Indonesia uses a unique two-tier board system embedded in Indonesia’s Company Law; OJK highlights that the BCP "does not advocate for a specific board structure" but emphasizes adherence to company law in each jurisdiction. - OJK positions corporate governance knowledge as "a fundamental skill for bank supervisors": - Supervisors are equipped to assess governance in examinations and on-site inspections. - Corporate governance is "the first element" and "the heart" of the supervisory assessment in the banking soundness rating assessment. - OJK requires a cooling off period of one year before former executive management can be considered as "independent" members. - Supervisors "have constantly challenged the effectiveness of the role of Board of Commissioners in all steps of supervisory measures." ### Regulatory updates and risk management - OJK issued and implemented POJK 17 of 2023 (corporate governance implementation for commercial banks) on 14 September 2023. - OJK has regulations covering: - Risk management expectations, including risk culture, ICAAP, SREP, and stress testing. - Definition of related party transactions; OJK states there have been "no cases to date" reflecting imprudent loans to family of the Board of Commissioners or asset write-offs to benefit related parties. - LCR and NSFR, with full adoption of the runoff assumption specified in the Basel LCR framework; supervisors evaluate LCR implementation using a risk-based approach. - Operational risk framework: - Bank supervisors are required to assess 7 key drivers of operational risks (6 of which are non-IT). - Both IT and non-IT operational risk domains are subject to off-site supervision and on-site examination. - OJK has "significant non-IT operational risk specialists." - OJK emphasizes continuous enhancement of risk management practices to address emerging risks and applies supervisors' review of banks’ internal risk measurement modelling. ### Islamic banking — institutional framework, scope, and strategy - The focused review of Islamic banking was part of the 2023 FSAP and assessed five additional core principles (ACPs) specific to Islamic banking in the CPIFR (adopted by the IMF starting January 1, 2019). The five ACPs focus on: - Treatment of Profit-Sharing Investment Account (PSIA)/Investment Account Holders (IAHs), - Shariah governance framework, - Equity investment risk, - Rate of return risk, - Islamic windows operations. - Review scope: laws, regulations, and practices in place at the time of review in October 2023, including planned regulatory issuances; authorities provided a comprehensive self-assessment and supervisory documents. - Size and structure of Islamic banking sector (as of July 2023): - Islamic banking assets share of total banking assets: 7.3 percent (2018: 6 percent). - Year-on-year growth rate: 13.6 percent. - Composition: - 13 full-fledged Islamic commercial banks contribute 66 percent of Islamic banking assets. - 20 Islamic windows contribute 31 percent. - 171 Islamic rural banks contribute 3 percent. - The largest Islamic bank accounts for around 40 percent of the market share of the Islamic banking industry and is the only Islamic bank in KBMI 3 category. - Majority of Islamic banks are in KMBI 1 category, with core capital up to Rp 6 trillion. - National strategic framework: - Indonesia Islamic Economic Masterplan 2019-2024. - Strategic plan for the Development and Strengthening of Indonesian Islamic Banking 2023-2027 (to be finalized by end 2023). - Builds upon the 2020-2025 Islamic Banking Development Roadmap. - Objectives: strengthen resilience, competitiveness and socio-economic impact of Islamic banking. - Institutional responsibilities: - OJK responsible for microprudential regulation, supervision and development of Islamic banking since end-2013. - Department of Islamic Banking (Islamic Banking Regulation and Development Directorate and Islamic Banking Supervision Directorate) supported by 84 officers (at time of assessment). - Other institutions and roles: - BI: develop broader Shariah economy; regulates monetary, macroprudential and payment system policies applicable to Islamic banking. - Deposit Insurance Corporation (LPS): protects Islamic deposits; acts as resolution authority for Islamic banks and Islamic windows. - National Sharia Board (Dewan Sharia Nasional, DSN): independent authoritative body to issue Shariah rulings. - Sharia Accounting Standards Board of the Institute of Indonesia Chartered Accountants (DSAS-IAI): formulates Sharia Financial Accounting Standards. - Legal framework: - The 2023 Law regarding Developing and Strengthening of the FSOL includes Part 3 on Sharia Banking. - Article 26 of Part 3 requires Islamic banking business activities to comply with Shariah principles as determined by institutions authorized to issue Shariah rulings. - OJK’s Islamic banking regulatory framework combines regulations in common with conventional banking (e.g., corporate governance, anti-money laundering, information technology, audit) and regulations specific to Islamic banking (e.g., Shariah governance, asset quality, Risk-Based Bank Rating (RBBR), and risk management). ### Observations and recommended organizational/regulatory enhancements for Islamic banking - Institutional coordination: - OJK "functions well" with BI, LPS, DSN, and DSAS-IAI; coordination platforms and inter-agency arrangements are active and used to resolve emerging regulatory issues. - Internal OJK structure: - Internal restructuring completed in March 2023 centralized regulation, supervision and development mandates for Islamic banking into one Department of Shariah Banking under a single line of authority (Executive Director of Shariah Banking reporting to Deputy Commissioner of Banking and Shariah Banking Supervision and Chief Executive of Banking Supervision). - Recommendation: avoid dilution of the primary safety and soundness supervisory mandate by separating supervisory function from development function; improve integration of Shariah banking supervision with overall banking supervision to enable cross-sectoral insights. - Regulatory synchronization: - Key Islamic banking regulations (capital, risk management, asset quality) are issued separately and typically have later effective dates compared to conventional banking regulations. - Recommendation: plan a forward-looking regulatory calendar that synchronizes issuance of regulations applicable to both Islamic and conventional banking to reduce market distortions and regulatory arbitrage. - Profit-and-loss sharing instruments: - Need for further clarification and coherent treatment of profit-and-loss sharing Shariah contracts. - Concerns: application of Mudharabah for principal guaranteed deposits on the liability side gives rise to Shariah risk, operational risk, conduct risk and Displaced Commercial Risk (DCR). - Asset side: limited application of equity investment; Islamic banks mainly focus on financing. - FSOL changes: recognized "investment" as a separate category from "deposit" on the funding side and expanded equity participation on the asset side to non-financial activities. - Recommendation: finalize supporting regulations to address specificities of profit-and-loss sharing instruments on asset and liability dimensions and their treatment upon liquidation/resolution. ### Main findings on ACPs — Shariah Governance Framework (CPIFR 16) - Foundational elements: - Laws, corporate governance regulation and circular letters require Islamic banks to comply with Shariah principles at all times. - DSN provides clarity through Shariah rulings that regulators and industry can request and refer to; DSN rulings are published/accessible. - Draft Shariah governance regulation: - "The new draft Shariah governance regulation should be finalized and implemented within by first quarter 2024." - Current Good Corporate Governance regulation covers ex-ante requirements (e.g., establishment of SSB and responsibilities); the draft regulation offers more comprehensive coverage on Shariah review, risk management and audit, and clearer sanctions for Shariah non-compliances. - Recommendation: finalization and implementation "within the next six months" to address critical regulatory gaps. - Shariah Supervisory Board (SSB) appointment and oversight: - Appointment process: nomination by bank, endorsement from DSN, approval by OJK, formal appointment by General Meeting of Shareholders. - OJK’s evaluation of candidates is based on information submission by banks and engagement with candidates. - Recommendation: OJK’s supervisory evaluation should formally incorporate fit and proper assessments and assess the effectiveness of the SSB as a whole, not only individual contributions. *Source: Otoritas Jasa Keuangan (OJK) response and FSAP material in the provided PDF content.* ### 14. Oversight accountability on Shariah governance implementation and overall Shariah ### 14. Oversight accountability on Shariah governance implementation and overall Shariah ### Shariah governance oversight and accountability - The line of accountability between the Board of Commissioners (BoC), BoD and the SSB with regards to effective implementation of Shariah governance and overall Shariah compliance should be clearly defined for a robust Shariah governance system. - The accountability of the BoC and BoD vis-à-vis SSB and the authority of SSB relative to its “advisory role” needs to be specified more clearly in the new draft Shariah governance regulation. - The Shariah governance regulation should require Islamic banks to have an appropriate and transparent process for resolving any differences of opinion between the BoC/BoD and the SSB; this process may include referral to the DSN after duly informing the supervisory authority. - Supervisors should take a holistic and horizontal view of non-compliances to determine and address underlying root causes of Shariah non-compliances (e.g., system, governance effectiveness, risk culture, quality of control functions). - Overlay on-going supervision with horizontal thematic reviews on Shariah governance implementation and material Shariah contracts application by Islamic banks to assess industry-wide Shariah-related risks. ### Supervisory capacity and practices - Current Shariah risk specialist team: less than three people in the Risk Specialist department supporting the Shariah Banking department. - There are on-going efforts to build knowledge and understanding among supervisors on Islamic banking specificities; benefit would be gained from more structured and technical capacity development programs. - Recommendation: allocate more resources to enhance supervisory expertise to keep pace with the growing size and complexity of the Islamic banking industry. - Supervisors currently have access to SSB and relevant records including internal and external Shariah audit reports; supervisory assessment and DPS reports are comprehensive and detailed. - Supervisory evaluations should identify systemic root causes of recurring non-compliances rather than only reviewing individual bank practices. ### Treatment of Investment Account Holders (IAHs) (CPIFR 14) - Placement of funds under profit and loss sharing contracts (mainly under the terms of Mudharabah Mutlaqah) is currently treated as principal guaranteed “deposits” in practice. - Dana Investasi Non Profit Sharing accounts for 82 percent of total deposits in the Islamic banking system and are covered by LPS, subject to deposit protection criteria. - Remaining deposits are based on Wadiah contract. - The law recognizes “investment” as a separate category from “deposits” but Profit Sharing Investment Account (PSIA) are not yet offered by any Islamic banks (including Islamic windows) in Indonesia due to lack of market readiness. - Lack of clarity and coherence in use of profit and loss sharing contracts on funding side gives rise to material risks: Shariah risk, operational risk, conduct risk and Displaced Commercial Risk (DCR). - No clear DSN ruling recognizes Mudharabah-based deposits as a liability of Islamic banks; therefore the bank may bear asset risk while the contract is profit and loss sharing in substance but “deposit-like” in application. - Heightened operational and conduct risk arises in implementing contractual agreements where application is deposit-like; pressure to apply income smoothing practices such as Tanazul Haq, profit equalization reserve (PER) or investment risk reserve (IRR) is increased. - Only broad DSN guidance on Shariah aspects of income smoothing exists; varying internal bank practices and supervisory professional judgment produce inconsistent outcomes. - Recommendation: OJK should develop internal supervisory guidance to streamline evaluation of income smoothing practices by Islamic banks. - Recommendation: OJK should prescribe formal guidance on fiduciary duties of Islamic banks toward investor customers (IAHs); current regulation prescribes a 1 percent alpha for assets funded by PSIA to reflect “residual risk” which is not coherent with PSIA risk-absorbent characteristics. - Recommendation: subsidiary legislation is needed to clarify treatment of “investment” (unrestricted and restricted) upon liquidation or resolution; LPS Regulation No. 1, 2020 does not provide this clarity. ### Equity investment risk (CPIFR 24) - The FSOL widens business activities of Islamic banks to include equity participation in non-financial activities but supporting regulations are not yet in place. - New draft regulation on Risk Management (under finalization) is broadly aligned with CPIFR 24, but further specification is needed to set prudential limits on equity participation in non-financial activities (e.g., real estate) to mitigate concentration and contagion risks. - For equity participation in financial activities, Islamic banks are subject to 35 percent threshold of total bank capital. - Recommendation: finalize and implement the new Risk Management regulation within the next six months. - In practice, Islamic banks undertake investments in shares of financial activities on a limited basis and rarely participate in direct investment in projects, portfolios or investment through investment vehicles. - Assets funded by Mudarabah placements are more commonly used to provide financing or purchase fixed income instruments to generate stable returns to IAHs. ### Rate of Return Risk (CPIFR 26) - Key elements of Rate of Return (ROR) Risk are reflected in the RBBR framework and will be updated in the new Risk Management regulation being finalized by OJK. - Supervisors require Islamic banks to have an appropriate ROR risk strategy and risk management framework (including for managing DCR, where applicable) and supporting systems to identify, measure and assess ROR impact on the balance sheet. - Recommendation: OJK should continue to upskill supervisors with technical expertise to assess banks’ capacity to manage ROR risk, with support from Risk Specialists. - Recommendation: enhance monitoring of ROR risk through more regular assessments on maturities, currencies, features and behavioral contractual maturity of various financial instruments offered by Islamic banks and Islamic windows. - Recommendation: further strengthen supervisory evaluation on DCR as more banks apply different income smoothing methods. - OJK’s 2021 survey on income smoothing practices is noted as a good initiative. ### Islamic windows operations (CPIFR 32) - Increase in minimum capital funds for Islamic windows is reasonable and aligned with strategic plan; prevention of withdrawal of Islamic windows’ capital funds by host conventional banks should be clarified. - Regulations outline segregation standards for capital for Islamic windows, but additional clarity needed to prevent host banks withdrawing funds that would compromise capital adequacy and liquidity of the window. - The “spin-off” of Islamic windows to Islamic subsidiaries: forms and criteria are stipulated in the 2023 Regulation No. 12 Concerning Sharia Business Units; transition period is 18–24 months for windows meeting conversion criteria. - Recommendation: early and close engagement between supervisors and Islamic windows subjected to “spin-off” to mitigate residual risks from conversion; ensure compliance with minimum capital funds, Legal Lending Limits (Batas Maksimum Penyaluran Dana), corporate governance and Shariah governance. - Article 61 of the 2023 Regulation grants OJK broad powers to request separation of Islamic windows to subsidiaries or via consolidation based on criteria: a) the Islamic windows did not experience significant growth; b) the conventional banking which owns Islamic windows is considered not to have the ability to develop the Islamic windows; c) the need for Shariah banking development strategy; and d) other factors. Recommendation: clarify scope and application of Article 61 to mitigate uncertainties. - Shariah governance regulations applied to Islamic windows are comparable to full-fledged Islamic banks; new draft Shariah governance regulation aligns minimum SSB composition for Islamic windows with Islamic commercial banks. - Liquidity Coverage Ratio (LCR) is not applied at Islamic window level despite segregation of assets and liabilities; recommendation: apply LCR at both entity and Islamic window level. - Legal framework for liquidation/resolution should clarify treatment of Islamic windows’ assets and liabilities and contractual rights of investor customers/IAHs in event of liquidation/resolution of host conventional bank. ### Summary of Recommendations on Principles Specific to Islamic Banking in CPIFR - Shariah governance framework (CPIFR 16): - Strengthen SSB evaluation by banks and OJK to formally incorporate fit and proper assessment. - Supervisors to assess SSB’s collective knowledge and effectiveness as a whole, as well as individual contributions. - Clarify oversight responsibilities and line of accountability between BoC/BoD and SSB in new Shariah governance regulation. - Require transparent processes to resolve differences between BoC/BoD and SSB. - Supervisors to take holistic/horizontal view of non-compliances and overlay thematic reviews. - Build supervisory capacity for effective Shariah risk supervision. - Finalize and implement the new Shariah governance regulation by first quarter 2024. - Treatment of IAHs (CPIFR 14): - Align use of profit and loss sharing contracts with intended purpose and substance. - Develop internal supervisory guidance on income smoothing evaluation. - Prescribe formal guidance on fiduciary duty toward investor customers. - Develop subsidiary legislation clarifying treatment of “investment” upon liquidation/resolution. - Equity investment risk (CPIFR 24): - Specify prudential limits on equity participation in non-financial activities. - Finalize and implement new Risk Management regulation by first quarter 2024. - Rate of return risk (CPIFR 26): - Enhance monitoring of ROR risk through regular assessments of instrument characteristics. - Strengthen supervisory evaluation on DCR. - Upskill supervisors with technical expertise, supported by Risk Specialists. - Finalize and implement new Risk Management regulation by first quarter 2024. - Islamic windows operations (CPIFR 32): - Clarify prevention of withdrawal of funds from Islamic windows by host banks. - Conduct early and close engagement for spin-off conversions. - Clarify scope and application of Article 61 of the 2023 regulation on Islamic windows. - Apply LCR at both entity and Islamic window level. - Clarify treatment of Islamic windows’ assets and liabilities in liquidation/resolution of host bank. ### Authorities’ response (selected points) - Otoritas Jasa Keuangan (OJK) expressed appreciation to the IMF-World Bank Mission assessment team and noted the assessment was comprehensive and professional. - The assessment confirmed Indonesia’s commitment to development and strengthening of the Islamic Banking industry and noted the sector remained sound and resilient amidst recent global banking turmoil. - OJK announced the Roadmap for the Development and Strengthening of Indonesian Sharia Banking (RP3SI) 2023-2027 was officially launched on November 27, 2023, with the theme "Resilient Sharia Banking, for a Prosperous Society." RP3SI’s vision: create a sharia banking industry that is sound, efficient, upholding integrity and competitiveness, and contributes significantly to the national economy to achieve the benefit of society. *Source: 14. Oversight accountability on Shariah governance implementation and overall Shariah (excerpt).* ### 35. The FSOL has mandated that OJK may request the separation of Islamic windows into full- ### 1idnea2024004-print-pdf - 35. The FSOL has mandated that OJK may request the separation of Islamic windows into full- ### Separation of Islamic windows and OJK authority - The FSOL has mandated that OJK may request the separation of Islamic windows into full-fledged Islamic commercial banks in the context of consolidating Islamic banking. - Recommendation to further specify guiding principles in the application of OJK’s broad powers under Article 61 of the 2023 Regulation on Islamic Windows: - It is crucial for OJK to be the ultimate decision-maker to maintain financial stability. - Based on OJK’s experience, rule-based regulation cannot anticipate or accommodate unpredictable situations that might need the intervention of authority. - The main principle of Article 61 is to encourage, not force, the consolidation of Islamic banking industry. - OJK will also always formulate policy to the benefit of the industry and national financial stability, thus OJK will not allow any abuse of power in the implementation of the regulation. ### LCR application for Islamic windows - Interpretation and stance: - All conventional banks with Islamic windows are all based in Indonesia. - IFSB GN-6 Guidance Note on Quantitative Measures for Liquidity Risk Management in IIFS page 10: in the case of Islamic windows where the parent (conventional) entity is situated in another jurisdiction, the supervisory authority in jurisdiction where the window is situated may need to apply LCR requirement to the window as it were a separate legal entity since the parent entity’s HQLA are not necessarily available when needed or, Sharī`ah-compliant. - In OJK’s interpretation, the parent (conventional) entity stated in the clause is conventional banks that have Islamic windows, not the parent bank of the conventional ‘host’. - Operational implications: - If Islamic Windows is in liquidity distress, it could use a source of funds from its conventional bank (based in Indonesia) using a Sharia contract (based on Ta’limat DSN Number 286 on Implementation of Sharia Principles). - However, it could not go the other way around. - Based on this fact, OJK argues that the implementation of LCR for Islamic windows at the entity level (Conventional banks that have Islamic Windows) is sufficient. - Nonetheless, OJK will consider LCR application at the Islamic windows level and will undergo a study to review its application. ### Risk management guidance and regulatory alignment - OJK actions to align with CPIFR and FSAP recommendations: - As part of commitment to the FSAP process and to align OJK’s regulation with the CPIFR, especially CPIFR 24 (Equity Investment Risk) and CPIFR 26 (Rate of Return Risk), OJK has issued OJK Circular Letter Number 25/SEOJK.03/2023 concerning the Implementation of Risk Management for Sharia Commercial Banks and Sharia Business Units on 21 December 2023. - Objectives and scope of the Circular Letter: - The objective is to encourage Sharia Commercial Banks and Sharia Business Units to manage and mitigate risks through the process of identifying, measuring, monitoring, and controlling risks under Sharia banking business activities and considering conformity with Sharia principles, including risks specific for Islamic banking which are equity investment risk and rate of return risk. - This Circular Letter regulates: - the application of risk management in general, - the application of risk management for each type of risk, - risk profile assessment, and - reporting. ### Sharia governance regulation - OJK continues to encourage strengthening governance and increasing public trust in the application of Sharia principles by issuing OJK Regulation Number 2 of 2024 concerning the Implementation of Sharia Governance for Sharia Commercial Banks and Sharia Business Units on 16 February 2024. - Key features and intended effects: - Regulates basic and strategic matters in the implementation of governance to ensure compliance with Sharia principles in the business and operational activities of Sharia Commercial Banks and Sharia Business Units. - Includes strengthening the authority, structure, and function of Shariah Supervisory Boards. - Aims to address critical gaps in current regulations to answer the essential criteria in CPIFR 16: Sharia Governance Framework. - Provides more comprehensive coverage and more granular requirements on: - the implementation of Sharia compliance functions, - sharia risk management functions, - sharia internal audit function, - the obligation to carry out external reviews on the implementation of sharia governance. - Regulates clearer sanctions for Shariah non-compliances to support more effective management of Shariah non-compliance risks. ### OJK engagement with FSAP and international standards - OJK appreciates the assessors’ constructive comments during the FSAP mission and the written feedback in the report. - OJK acknowledges the FSAP’s crucial role in ensuring consistent banking regulatory and supervisory practices across jurisdictions with international standards issued by standard-setting bodies, including the IFSB. - OJK expects the assessment process can also be valuable input for international standard development process in the future. - OJK will continue to further promote the safety and soundness of the Indonesian Islamic banking sector through strengthening the regulatory and supervisory framework in line with international standards and best practices. *Source: 1idnea2024004-print-pdf - page 35* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1idnea2024004-print-pdf.pdf_