IMF Executive Board Approves Indonesia’s 2017 Financial System Stability Assessment
IMF News, June 12, 2017
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Bibliographic details
- Published: June 12, 2017
Key dates and identification
- Press Release No. 17/216
- June 12, 2017
- Executive Board discussion held on May 24, 2017
Macroeconomic and financial system overview
- Since the 2010 Financial Sector Assessment Program (FSAP), Indonesia’s macroeconomic performance has been robust and the financial system has been stable.
- Total financial system assets equal about 72 percent of GDP, three quarters of which reflect banks’ assets.
- Indonesia’s financial system is relatively shallow and dominated by banks belonging to financial conglomerates.
- Capital markets are relatively thin; external financing is important for long-term financing due to a small domestic investor base.
Systemic risk, resilience, and stress-testing
- Systemic risk is low and the banking system appears generally resilient to severe shocks.
- Market-based indicators point to relatively low levels of systemic risk.
- Under severe stress-test scenarios:
- Banks experience sizable credit losses, particularly from corporate exposures.
- High capital levels and strong profitability help to absorb most of these losses and the resulting capital shortfalls are modest.
- Many banks face relatively small shortfalls in liquidity stress tests, including in foreign currency; these appear manageable for Bank Indonesia (BI).
Recent reforms and supervisory framework
- Major reforms implemented since the 2010 assessment:
- Implementation of the Basel III capital framework.
- Adoption of a new insurance law.
- Improved supervisory practices across sectors.
- Establishment in 2011 of the Financial Services Authority (OJK) as an integrated regulator to oversee the entire financial sector.
- BI developed analytical tools to assess systemic risk and introduced several macroprudential instruments.
- In 2016, the framework for crisis management and resolution, and safety nets was revamped under the new Prevention and Resolution of Financial System Crisis Law (PPKSK Law).
- Progress in anti-money laundering and combating the financing of terrorism framework was noted, with further efforts needed to align with the revised Financial Action Task Force standard.
Outstanding vulnerabilities and supervisory challenges
- Corporate vulnerabilities have remained broadly in check, though debt at risk is elevated in some sectors and external refinancing risk persists.
- The banking system remains sound even though, as economic growth has slowed:
- Banks’ high profitability has fallen somewhat.
- Problem loans have risen.
- Banks’ capitalization remains strong and well above regulatory minima.
- Main supervisory challenges:
- Complex structure and weak governance practices of financial conglomerates and OJK’s capacity to supervise them.
- Silos in OJK’s internal structure.
- An insufficiently intrusive supervisory approach across sectors.
- Legal protection for staff and agencies involved in oversight and crisis management has been strengthened but is not in line with best international practice and risks causing inaction bias.
- Crisis-management related concerns:
- The mandates for OJK supervision and BI’s macroprudential policy do not give clear primacy to financial stability over developmental objectives, which can undermine timely actions.
- The role of the Financial System Stability Committee in designing resolution strategies and directing member agencies, and the important role envisaged for the President of Indonesia in crisis management, risk diluting the responsibility of relevant agencies in taking swift action.
- The new framework rules out the use of public funding in resolution which can be overly constraining.
- The restrictive criteria for providing emergency liquidity assistance risk making it ineffective in crisis.
Executive Board assessment and recommendations
- Executive Directors agreed with the findings and the key recommendations of the FSSA.
- Commendations and encouragements:
- Commended Indonesian authorities for major reforms since the 2010 assessment, notably integration of financial sector supervision, upgrading of the crisis management and resolution framework, and implementation of Basel III.
- Encouraged authorities to implement the recommendations of the FSSA to further enhance financial sector resilience, while promoting financial deepening and inclusion based on a clear roadmap.
- Monitoring and supervisory recommendations:
- Closely monitor systemic risks and remain vigilant to events that can disrupt financial stability.
- Implement liquidity requirements in foreign currency.
- Carefully monitor special mention and restructured loans, and improve loan classification and provisioning.
- Strengthen interagency cooperation in financial oversight and crisis management; welcomed establishment of OJK.
- Legislative amendments recommended to:
- Clarify institutional responsibilities for OJK and BI that prioritize financial stability over development objectives.
- Include a macroprudential mandate for BI.
- Reduce overlap in supervisory activities.
- Improve legal protection for staff involved in supervision and crisis management.
- Strengthen the framework for supervising financial conglomerates given their systemic importance; effective risk-based supervision will require legislative changes, improved corporate governance, and more integrated supervisory processes.
- Further enhance the effectiveness of the Prevention and Resolution of Financial System Crisis Law by:
- Refining the emergency liquidity assistance framework.
- Clearly defining the roles of the President and the Financial System Stability Committee in crisis management.
- Allowing for public funding of resolution in limited circumstances justified by systemic stability considerations and under appropriate safeguards.
Additional context on FSAP and FSSA process
- The Financial Sector Assessment Program (FSAP), established in 1999, is a comprehensive and in-depth assessment of a country’s financial sector.
- FSAPs provide input for Article IV consultations and thus enhance Fund surveillance.
- FSAPs are mandatory for the 29 jurisdictions with systemically important financial sectors and otherwise conducted upon request from member countries.
- The key findings of an FSAP are summarized in a Financial System Stability Assessment (FSSA), which is discussed by the IMF Executive Board.
- At the conclusion of the FSSA discussion, the Chairman of the Board summarizes the views of Executive Directors and this summary is transmitted to the country’s authorities.
IMF Executive Board Approves Indonesia’s 2017 Financial System Stability Assessment (Press Release No. 17/216), June 12, 2017.