Recovery Plan for Indonesian Systemic Banks Issues and Challenges of Development and Implementation of Recovery Plan

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1 Recovery Plan for Indonesian Systemic Banks Issues and Challenges of Development and Implementation of Recovery Plan Kartika Wirjoatmodjo, PERBANAS, Chairman LPS International Seminar on Bank Restructuring and Resolution Jakarta, 28 February

2 Lessons learned from the Asian crisis and global crisis To strengthen supervisory tools, regulatory frameworks have been established for prevention and handling of problems in financial system stability, e.g. Basel III (capital buffer, LCR, etc) and Recovery & Resolution Planning. To minimize economic & fiscal costs from banks failures, financial authorities have shifted the bank rescue mechanism from bail-out to bail-in. Stronger coordination was put in place between regulatory bodies with regards to safeguarding the financial system stability (in Indonesia: the creation of KSSK that comprises of MoF, Bank Indonesia, OJK and LPS). Banks need to reinforce their risk management infrastructure and governance process, e.g. stress testing, early warning, contingency plan, and recovery plan. The Financial Stability Board (FSB) states that a recovery plan identifies options to restore the financial strength and viability when the firm comes under severe stress, whereas it defines resolution as the situation when a firm is no longer viable or likely to be no longer viable and has no reasonable prospect of becoming so. 2

3 Recovery Plan as a part of the financial system stability RECOVERY PLAN FINANCIAL SYSTEM STABILITY UU No.9/2016 PPKSK (PENCEGAHAN & PENANGANAN KRISIS SISTEM KEUANGAN) Rencana Aksi (Recovery Plan) Bagi Bank Sistemik POJK 14/2017 EXIT POLICY Penetapan Status dan Tindak Lanjut Pengawasan Bank POJK 15/2017 BRIDGING BANK Bank Perantara (Bridging Bank) POJK 16/2017 BANKS FINANCIAL AUTHORITY (OJK) RESOLUTION AUTHORITY (LPS) There are currently 11 Domestic Systemically Important Banks (D-SIBs) required to develop and implement a recovery plan. POJK Exit Policy provides rules and mechanism for bank monitoring process to place banks under close surveillance should their financial condition deteriorate and fall into Bank Dalam Pengawasan Intensif (BDPI) or Bank Dalam Pengawasan Khusus (BDPK) categories. LPS is equipped with the power to setup a bridging bank (as a resolution vehicle) to take over assets and liabilities from a failed bank, in order to maintain its operation while proceeding with a financial recovery process. 3

4 Recovery plan and resolution plan (RRP) in Asia Pacific OJK and LPS are relatively ahead of their peers in the implementation of RRP (Malaysia, Thailand). LEGISLATION IMPLEMENTATION STATUS JAPAN KOREA CHINA HONG KONG INDIA THAILAND SINGAPORE INDONESIA MALAYSIA AUSTRALIA RECOVERY PLANNING RESOLUTION PLANNING RESOLUTION POWERS Submitted by G-SIBs and other SIBs (if necessary) Almost completely in place No requirements or plans implemented yet, but in development (reform/policy already published) Partially implemented Submitted by Banking Groups Submitted by G-SIBs; no plans for D- SIBs Not completely implemented yet Submitted by all Banks Foreign G-SIBs & some D-SIBs are involved in group resolution planning Final consultation concluded in April 2017 including all resolution powers No requirements or plans implemented yet, but in development; early plans to introduce a resolution regime Pilot Program conducted for 6 Financial Institutions with formal submission in 2018 Draft Resolution framework is under development Submitted by D-SIBs and other important banks Partially implemented with further legislative amendments planned Submitted by 11 D-SIBs No formal framework in place, but special Early activities by regulators on resolution planning. No plans in place as of now Partially implemented resolution regimes used in practice Authorities have powers to intervene (e.g. remove senior officers and undertake recovery and resolution actions) Submitted by 4 D-SIBs and lighter touch recovery plans needed for further 18 Banks To be developed Partially implemented; further powers in development 4 Source: Perspective on Recovery and Resolution Planning in Asia Pacific, Oliver Wyman, 2017.

5 Benefits and values added of a recovery plan Banks recognize added benefits of developing and implementing a recovery plan beyond a tickingthe-box regulatory exercise. UNDERSTANDING CORE BUSINESSES ENHANCING RISK GOVERNANCE IDEAS IN NORMAL AND CRISIS CONDITION Recovery planning has forced banks to understand thoroughly what their core businesses really are, and give priorities on those. Recovery plan provides a good tool to review a bank s business model objectively. Recovery planning provides opportunity for banks to enhance their internal risk management processes and governance e.g. risk appetite framework, stress testing and contingency plan. Recovery planning gives banks ideas how to act in a crisis situation, where these ideas might also be useful for business as usual discussion (e.g. business valuation). 5 Source: Recovery planning - What more do banks need to do?, KPMG, 2017.

6 D-SIBs solvency, asset quality, liquidity and profitability Indicators BMRI BRI BCA* BNI BTN CIMB Niaga* Maybank* Danamon Permata* CAR Panin* NPL (gross) OCBC NISP % Average LCR ROE BUKU IV IV IV IV III IV III III III III III DSIB bucket Data As of Q4 2017, except for * BCA, CIMB Niaga, Maybank, Permata and Panin (as of Q3 2017) D-SIBs are well capitalized, with average CAR of 20.5%, and are mostly in the form of CET1 which is of high loss absorbing capacity. Liquidity is sufficient, with average LCR of 197.8%, mostly in the form of short-term placement (incl. placement with BI) and marketable securities (incl. government bonds). Although asset quality was recently slightly depressed but it starts to recover to a healthy level. Hence profitability is also picking up. 6

7 Recovery Plan development - key components of a recovery plan Core Businesses Lines & Critical Functions Interdependencies Scenarios & Stress Testing Identification of Core Business Lines (internally significant business lines). Identification of Critical Functions (externally and economically significant functions/services) Detailed analysis on: Financial interdependencies. Operational interdependencies. Stress testing using scenarios: Macro-wide shock and idiosyncratic. Impact on: capital (CAR, CET1) liquidity (LCR, NSFR, GWM) profitability (ROE, ROA, BOPO) asset quality (NPL gross & net) Triggers & Indicators Triggers/indicators for: capital (CAR, CET1) liquidity (LCR, NSFR, GWM) profitability (ROE, ROA, BOPO) asset quality (NPL gross & net) Monitoring against thresholds for each indicator. Recovery Options Contingency actions for each indicator: Liquidity: DPK pricing, stop loan expansion, sale of marketable securities or non-core subsidiaries/business lines, PLJP (pinjaman likuiditas jangka pendek). Capital: contingent convertibles. Profitability: stop capex. Asset quality: loan provisioning, write off. Governance & Communication Set up a board committee and its apparatus for executing, directing and monitoring recovery plan and recovery options. Setup a communication plan (internal and external). Source: KPMG Indonesia. 7

8 Progress of the recovery plan development and implementation REGULATION DEVELOPMENT & REFERENCE DISCUSSIONS & INPUTS 1 st SUBMISSION SHAREHOLDERS APPROVAL 2018 OJK released POJK Recovery Plan (No. 14/2017) in April 2017 that requires systemic banks (currently 11 D- SIBs) to develop and submit recovery plans to OJK by December POJK also requires D- SIBs to have equity-like debt instruments by December Considering the high level nature of POJK Recovery Plan, D-SIBs looked to best practices and some of them assigned international consulting firms to help with recovery plan development. At minimum, RP should comply with POJK requirements with enhancements in annual reviews. OJK and D-SIBs held discussions during RP development, and OJK provided necessary inputs. It was agreed that RP should be robust and credible and need to be a dynamic and living document that will serve as a primary guidance for banks in times of financial stress. D-SIBs submitted their recovery plans to OJK by December 2017, after having required approval from their Board and the ultimate shareholders. OJK provided some feedback for corrections. D-SIBs will ask shareholders for RP approval in their annual general shareholders meetings in Some D-SIBs will issue equity-like debt instruments in 2018 to comply with POJK mostly in the form of sub-debt instruments with conversion or write-down features. 8

9 Banking industry perspective on resolution plan EARLY CONTINGENCY In the period of stress leading to crisis, banks will exercise first its early contingency plan. When the stress condition worsens and transforms into a crisis, then banks will activate their recovery plan and exercise recovery options available according to stages as planned. 3 LEVELS OF RECOVERY (as per POJK Recovery Plan) PREVENTION RESTORATION RECOVERY Only when all options have been exhausted and banks condition still deteriorates and breaches regulatory thresholds, then the resolution plan kicks in. Banking industry sees the need to have a reliable and agile resolution mechanism, with some views: Resolution authority and financial authority need to facilitate prompt execution and smooth transition from recovery stages into resolution phase, without disrupting market stability and eroding public trust. Although a resolution plan is predominantly within the resolution authority power, banks need to look to best practices and prepare for these areas: 1. Banks need to be able to identify critical operational and finance-related services on which a bank s critical functions depend, and to be able to demonstrate how these critical services could be maintained if a bank was put into resolution With regards to valuation in resolution stage, banks need to be able to demonstrate that they: have sufficiently complete, accurate and readily available data and information; robust systems to undertake a valuation ahead of resolution.

10 Issues and challenges Indonesian banks and financial authorities are still at an early stage in the recovery and resolution planning Best practice references and benchmarks are needed. Testing an RP for its credibility (dry run or fire drill ) is a daunting task that needs coordination with authorities. Highly capitalized D-SIBs provide suboptimal economic justification for new capital issuance Issuance of equity-like debt instrument is mandatory, although CAR ± 20%. Timing of issuance needs to be carefully considered (impact from 11 D-SIBs) Recovery options need to be reviewed and supported to be credible (feasible during crisis) Financial and capital markets require adequate depth and large investor base to support credible recovery options (e.g. selling bonds/mbs or disposal of business/subsidiaries require adequate appetite from investors, especially during period of market-wide crisis). D-SIBs are likely also financial conglomerates, with subsidiaries that could pose risks to D-SIBs in crisis A strong D-SIB does not warrant an equally strong subsidiary which may drag down its parent during financial crisis (even in idiosyncratic scenario). 10

11 Going forward Authorities need to devise communication plan involving general public and investors in time of crisis Experiences from past crises (Asian and GFC) still leave some marks in public and investors minds. A coordinated and responsive communication plan needs to be laid out, and to be executed timely during crisis in order to calm the market and investors and regain public trust. Authorities, with government support, need to continue financial market deepening Deep and diverse financial markets and instruments not only beneficial in normal condition but can provide a wide array of tools that banks can use as credible recovery options Authorities and banks need to coordinate to review and enhance recovery planning Recovery plan needs to step beyond regulatory exercise. RP should provide clear insight of business and operation and provide robust and agile mechanism to respond to crisis in a timely manner. Recovery options needs to be credible and provide sufficient recovery capacity during crisis. Banks need to further align recovery planning with internal risk management process To gain optimal implementation, recovery planning needs to be integrated with risk appetite framework, strategic planning and stress testing. 11

12 Thank You