Towards Better Financial Supervisory Regime:
Perspective of Indonesia
Halim Alamsyah
Halim Alamsyah
Director of Banking Research and Regulation
Bank Indonesia
Bank Indonesia 7thAnnual International Seminar on Financial Stability
Bali - June 13 – 14, 2009
Presentation Plan
A Brief Note on The Role of Financial Sector
Financial Supervisory Regime and the Performance of
The Role of Financial Sector
Roles Descriptions
Intermediation Channel funds from surplus to deficit units
Payment System Carry out payment and fund settlements
Wealth Management Venue for leveraging assets and managing wealth
A financial sector in general performs some of the following functions:
Policy transmission Serving as a conduit for central bank policy in attempting to achieve its monetary policy target
Price discovery Help determine the price of an asset in the marketplace through the interactions of buyers and sellers
Allocation of resources Help apportion productive assets among
How to Make the Role of Financial Sector Works?
...depends on Financial Supervisory Regime...
•
There are at least 3 aspects need to be considered
:
–
Objectives of financial supervisory functions
•
Trade off between Efficiency vs. Stability
•
Support for equitable developments
–
Regulatory regime
–
Regulatory regime
•
Prudential vs market conduct regulations
–
Structure of financial supervisory functions
•
Integrated vs. two or three peaks models
Structure of Indonesian Financial System
In Billion IDR (USD = Rp10,000)
Source: Bank Indonesia, Bapepam-LK
Source: Bank Indonesia, Bapepam-LK
• A Bank-based economy – banks are leading financial institutions
• Capital market is growing but remain undersized
• Prevalent deposit to lending model - banks are heavily dependent on short term deposits (around 93% of deposits have maturity of less than 3 months)
• Banks confront high intermediary costs
A Skeleton of Financial Supervisory Regime
in Indonesia
•
Bank-based system
•
Separation between banks, NBFIs, and capital market
–
Each segments has its own Acts and regulations (Banking,
Insurance, Multifinance, Capital Market Acts
)
•
Coordination through the so-called financial stability
forum/committee
Financial Supervisory Regime in Indonesia
•
Put more emphasis on Banking Stability :
–
Encourage banks to place their excess liquidity into BI certificates (SBI)
–
LOLR for commercials and rural banks (BPR)
–
Deposits protection scheme (up to $200.000)
•
Setting a “firewall wall” between bank and capital market + NBFIs, e.g.
–
Limits on banks’ exposure toward capital market and underwriting
activities
activities
–
Limits on bank lending to NBFIs
–
Administrative control on short term external debt of banks , etc
•
Pursuing an active banking policy to encourage greater access for the poor
and unbanked groups
•
Promoting banking consolidation, esp through tier 1 capital requirement
•
Results so far
: stable, liquid, well capitalized and profitable
Financial System Depth (1/2)
114 97 90 71 42 53 48 61 45 136 55 0 20 40 60 80 100 120 140 160SGP MYS THA KOR VNM PHL INDO IND PAK JPN USA
M 2 / GDP (%) - 2008
127 103 94 82 37 49 40 55 49 149 139 46 0 20 40 60 80 100 120 140 160
SGP MYS KOR THA VNM PHL INDO IND PAK GBR JPN USA
Deposit Money Bank Assets / GDP (%) - 2008
• Indonesia financial system is lagging behind that of neighbouring ASEAN peers (in particular SG, MY, TH)
• Liquidity (M2/GDP) is less than its peers
• Total assets ratio is also the lowest among its peers
• Low penetration of banks compared to the size of economy – provides ample
opportunity for banks to expand their business volumes and competition
• Looking from this perpespective, Indonesia is not an overbank financial system
Financial System Depth (2/2)
• Market cap is smaller than that of other Asian countries
• Ample opportunity to develop
a deeper equity market
• Deep stock market helps stabilize financial system in Indonesia
157 153
13 74
53 41
31 28 50 24
134 129 75 52 82 271 74 92
8 8 17
62 89 167 162 84 38 54 252 182 152 82 13 15 89 298 121 163 104 0 100 200 300 400
MYS SGP TWN THA KOR CHN PHL INDO IND PAK USA GBR JPN
Equity Market (%) - 2008
Stock Market Capitalization / GDP Stock Market Total Value Traded / GDP Stock Market Turnover Ratio
• Similarly, bond market is not as develop as that of peer ASEAN countries, except PH.
• Corporate bond market is extremely small
• Overall, financial depth of Indonesia is less than its peers
• Ample opportunity to develop
a deeper financial system
91 76
60 60
40
30 30 26 33 34
188 160 0 50 100 150 200
MYS KOR SGP TWN THA CHN PHL INDO IND PAK JPN USA
Bond Market (%) - 2008
Public Bond Market Capitalization / GDP Private Bond Market Capitalization / GDP Total Bonds
Banking
Banking Performance
Performance in Indonesia
in Indonesia
Well-capitalized, with CAR of 17.6% (April 2009)
Profitable, yet some dues from placement in Bank Indonesia
Slow pace of intermediation in recent months
(In Trillion Rupiah, unless stated otherwise)
Dec-06 Dec-07 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 Total Assets 1,693.5 1,986.5 2,310.6 2,307.1 2,344.9 2,352.1 2,327.4
Deposits 1,287.0 1,510.7 1,753.3 1,745.6 1,767.1 1,786.2 1,780.9
- Demand deposits 338.0 405.5 430.0 430.7 427.3 437.0 442.8
Key Indicator
- Demand deposits 338.0 405.5 430.0 430.7 427.3 437.0 442.8
- Saving accounts 333.9 438.5 498.6 483.4 482.6 492.5 496.0
- Time deposits 615.1 666.7 824.7 831.4 857.2 856.7 842.1
Earning Assets 1,556.2 1,792.0 2,170.9 2,168.4 2,196.5 2,215.0 2,189.0
- Loans 832.9 1,045.7 1,353.6 1,325.3 1,334.2 1,342.1 1,332.1
- Certificate of Bank Indonesia 179.0 203.9 166.5 208.5 211.8 208.1 211.2
- Overnight Placement at BI 38.6 46.8 71.9 53.9 42.9 46.8 52.7
- Securities 342.9 350.2 358.5 361.6 373.3 374.0 362.9
- Inter-bank placement 156.8 139.8 213.8 212.3 227.5 236.9 223.4
- Equity Investment 5.9 5.6 6.6 6.8 6.8 7.0 6.7
Net Interest Income (Cumm.) 83.1 96.4 113.1 114.7 113.8 118.2 120.2
Capital Adequacy Ratio (%) 20.5 19.3 16.2 17.6 17.7 17.4 17.6
Loans/Earning Assets (%) 53.5 58.4 62.4 61.1 60.7 60.6 60.9
Gross Non Perform. Loans (%) 7.0 4.6 3.8 4.2 4.3 4.5 4.6
Net Non Perform. Loans (%) 3.6 1.9 1.5 1.6 1.6 1.9 2.0
Return on Assets (%) 2.6 2.8 2.3 2.7 2.6 2.8 2.7
Net Interest Margin (NII/AP) (%) 0.5 0.5 0.5 0.5 0.3 0.6 0.5
Operational Exp/Opr. Income (%) 86.4 78.8 84.1 86.4 86.9 82.3 82.0
Loan to Deposit Ratio (%) 64.7 69.2 77.2 75.9 75.5 75.1 74.8
Number of banks 130 130 124 123 123 123 122
Moderate Risks Facing
Moderate Risks Facing Banking
Banking Industry in Indonesia
Industry in Indonesia
• Traditional banking system – deposit to lend business model
• Leverage in general is not a pervasive problem
• Market risk exposure is limited, with negligible FX exposures
• Credit risk is manageable, albeit a slight upward pressures recently
• Systemic risk is relatively low– integrated stress testing reflected that vast
majority of banks are quite resilient against growing pressure of risks
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Profitable and yet still inefficient
Profitable and yet still inefficient (2/2)
(2/2)
•
Banking sector is very profitable – even compared to those
of neighboring ASEAN peers
•
Nevertheless, less efficient than its peers
•
Beside from lending, profits are some due to the facts that
placement in Bank Indonesia (SBI) are significant
•
As banks have limited option of financial instruments
ROA of Banks in South East Asia
86,4
82
84,1
74 76 78 80 82 84 86 88
2006 2007 2008
INDO MY PH TH
Operating Exp/Oper. Income of Banks in South East Asia
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Credit Risk Remains Moderately Increasing
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Presentation Plan
Stylized Facts on Indonesian Financial Sector
Post Crisis Banking Policy Response: Reasons behind the
notable performance
Sub-optimal banking system structure
Weak legal/regulatory and enforcements
Post 1997/98 crisis, Indonesian banking policy shifted to a total
transformation: after recapitalization cum consolidation programs
since 1999-2002, since 2003 Indonesian Banking Architecture (IBA)
has been set as the long term policy direction and responses to
structural weaknessess in six areas:
Banking Policy Direction
Weak legal/regulatory and enforcements
Feeble banks’ governance
Weak risk management and culture
Sub- optimal infrastructure
Key Initiatives of IBA
The IBA 6 key pillars are to:
1.
bolster the structure of the national
banking system
2.
enhance the quality of regulatory
regime according to international
Some key results:
1. Banking consolidation: number of
banks reduced significantly from 250 to 122
2. Roadmap on Basel 2 implementation
3. Implementation of 25 BCP and Risk
Based Supervision (RBS) system
17
2.
enhance the quality of regulatory
regime according to international
standards
3.
enhance the quality of supervisory
system
4.
strengthen the quality of bank
management and operations
5.
develop banking infrastructure
6.
develop effective customer protection
scheme
Based Supervision (RBS) system
4. Promotion of Risk Culture and Risk
Management
5. GCG implementation
6. Credit Bureau
7. Customer and Deposits protection
scheme
Presentation Plan
Challenges in Supervisory Function(1/2)
Challenges
Issues
1. Information Gap among
financial supervisors
•
Transparency needs to be improved;
•
Information gap among regulators in
Indonesia needs to close
2. Regulatory Arbitrage among
markets
•
Banks have been highly regulated
•
Financial institutions take advantage
•
Financial institutions take advantage
of regulatory differentials between
bank and non-bank as well as highly
and less regulated markets
3. Systemic prudential
enforcement
•
No legal power
Challenges in Supervisory Function (2/2)
Challenges
Issues
4. Stability vs Efficiency : Regulatory Forbearance
• There is an objective need to pursue active banking policy to provide greater acces for the poor and unbanked groups (financial inclusion);
• However, burden being put on banking
prudential policy without a well designed policy and clear objectives on access for the policy and clear objectives on access for the poor/unbanked people nationally
5. Crisis Management Protocol • CMP has been based on MOU (Emergency
Presentation Plan
Stylized Facts on Indonesian Financial Sector
Supervisory Regime in Indonesia
Future Global Financial System
•
Global financial integration goes on with international
financial centers continues to be heavily dependent on
open trade
•
Large and complex financial institutions continue to
operate in multiple jurisdictions
•
Capital markets will continue to develop as the source of
Post-crisis, financial system may have the following characteristics:
•
Capital markets will continue to develop as the source of
intermediation
•
But market players will tend to focus more on
counterparty risks
•
Regulators will focus more on systemic risks and there
are needs to have a stronger financial stability standards
Desired Roles of Financial Services in Indonesia
•
Given the complexity and imperfect global financial
architecture, there is still the need to pursue stability
objective in Indonesian context
•
Yet with a vision to have a more efficient financial system
so as to provide low-cost financing for the economy
•
The need to deepen financial system:
•
The need to deepen financial system:
•
Greater financial inclusion for poor and unbanked
society
•
Widen access of the SME to the financial markets
(access to finance for SMEs to support a long-term,
stable socio economid development)
•
Provide more financial instruments to wider array of
Support for equitable development
Future Financial Policy : A pragmatic approach
1.
More emphasis on
promoting efficiency i.e.
Putting more market
competition and financial
innovations;
2.
It may reduce the scope for
regulatory forbearance
(intervention) and rely more
on market mechanism to
Current Financial SystemMore Stability
More Efficiency
on market mechanism to
allocate resources, esp. to
SMEs
3.
However, it bears costs. It
may increase the risk of
instability in the financial
system;
