Towards Better Financial Supervisory Regime: Perspective of Indonesia Halim Alamsyah Director of Banking Research and Regulation Bank Indonesia This presentation does not represent views and stances of Bank Indonesia. All errors are my own. In addition, all data sources are from Bank Indonesia unless stated otherwise Bank Indonesia 7 th Annual 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 Indonesian Financial Sector Challenges in Financial Supervisory Regime Indonesia Future Financial Supervisory Regime in Indonesia
The Role of Financial Sector A financial sector in general performs some of the following functions: Roles Intermediation Payment System Wealth Management Policy transmission Price discovery Allocation of resources Descriptions Channel funds from surplus to deficit units Carry out payment and fund settlements Venue for leveraging assetsand managing wealth Serving as a conduit for central bank policy in attempting to achieve its monetary policy target Helpdetermine the price of an asset in the marketplace through the interactions of buyers and sellers Help apportion productive assets among different uses due to limited supply and scarcity of resources
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 Prudential vs market conduct regulations Structure of financial supervisory functions Integrated vs. two or three peaks models macro vc micro prudential responsibilities
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 Thus, banking failure can have significant magnitude of systemic risk
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 Currently being proposed in the Financial Safety Net Bill
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 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 banks; yet, less efficient and with a shallow financial market
Financial System Depth (1/2) 160 140 120 100 80 60 40 114 97 90 71 42 M 2 / GDP (%) - 2008 61 53 48 45 136 55 160 140 120 100 80 60 40 127 103 94 Deposit Money Bank Assets / GDP (%) - 2008 149 82 55 49 49 37 40 139 46 20 20 0 SGP MYS THA KOR VNM PHL INDO IND PAK JPN USA 0 SGP MYS KOR THA VNM PHL INDO IND PAK GBR JPN USA Source: International Financial Statistics, World Bank, and Bank Indonesia 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) 300 200 100 0 Stock Market Capitalization / GDP Stock Market Turnover Ratio 400 157 153 52 38 82 54 271 252 13 182 74 74 53 152 92 82 41 31 28 8 813 1715 298 89 89 62 50 24 167 162 163 134 121129 104 7584 MYS SGP TWN THA KOR CHN PHL INDO IND PAK USA GBR JPN 200 150 100 50 0 91 76 60 60 Equity Market (%) - 2008 Stock Market Total Value Traded / GDP Bond Market (%) - 2008 Public Bond Market Capitalization / GDP Private Bond Market Capitalization / GDP Total Bonds 40 30 30 26 33 34 MYS KOR SGP TWN THA CHN PHL INDO IND PAK JPN USA Source: International Financial Statistics, World Bank, and Bank Indonesia 188 160 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 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
A NotableBanking Performance in Indonesia A Notable Relatively stable, amidst the global crisis. Well-capitalized, with CAR of 17.6% (April 2009) Slow pace of intermediation in recent months Profitable, yet some dues from placement in Bank Indonesia Key Indicator (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 - 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 Number of bank office networks 9,110 9,680 10,936 12,007 12,033 12,039 12,201
Moderate Risks Facing Banking 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 Trillion IDR Loans, Deposits, and Total Assets 2,500 Pre Crisis Recover 2,000 Deposits 1,500 Total Assets 1,000 Loans 500 100% 80% 60% 40% 20% Banking Risk Exposure 100% 98,37% 100% 99,19% 95,12% - 09 09 M 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Jan- Feb- ar- 09 0% 0,00% 1,63% 0,00% 0,81% 4,88% FX Risk Interest Rate Govn Bond Credit Risk Integrated Risk Risk Risk Number of Bank Under High Risk Exposure Resilient
Profitable and yet still inefficient (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 88 Operating Exp/Oper. Income of Banks in South East Asia ROA of Banks in South East Asia 86 86,4 84 84,1 82 80 78 76 74 82 2006 2007 2008 INDO MY PH TH Sources: Respective monetary authorities in ASEAN
Credit risk is a major challenge for most Indonesian banks. Gross and net NPLs have been steadily trending upward (at 4,5% in April) Yet, banks have ample provisioning (>100%), making them capable of mitigating unexpected losses Bank Indonesia exercises strong vigilant mode over the credit risk exposure Credit Risk Remains Moderately Increasing (%) 10 9 8 7 6 5 4 3 2 1 Gross NPL (lhs) Net NPL (lhs) Non Performing Loan Nominal NPL (rhs) - 2003 2004 2005 2006 2007 2008 2009 13 (IDR T) 70 65 60 55 50 45 40 35 30 6.0 5.0 4.0 Gross NPL Ratio (%) Dec08 Mar09 Feb09 Apr09 % 8 7 6 5 4 Gross NPL Ratio by Sector des08 apr09 mar09 3.0 3 2.0 2 1 1.0 0 0.0 Working Capital Investment Consumption Agriculture Mining Manufacturing Electricity Construction Trade Transport Business Services Social Services Others
a. Banks hold sufficient liquid assets Banks hold ample liquid asset, of which 91% in IDR. This helps banks mitigate growing pressure to liquidity risk Trillion Rp 480 400 320 240 160 80 0 129,2% Liquid Assets Ratio 84,9%...Liquidity Risk is relatively moderate/low 112,0% Dec'06 March '08 Aug '08 Jan '09 Apr '09 Liquid Assets NCD Liquid Assets/NCD 180% 120% Liquid assets = cash and placement on BI NCD = 30%demand deposit + 30%saving deposit + 10% saving depsoits (tenor < 3 month) 60% 250 200 150 100 50 0 Trillion Rp Government Bond (rhs) Liquid Assets Certificate of BI/SBI (lhs) Fasbi/FTK (lhs) Dec'07 Apr'08 Aug'08 Dec'08 Apr '09 14 b. Liquid asset to short-term liabilities more than 100% Most banks are capable of meeting their short-term liquidity pressures or deposit withdrawals 295 290 285 280 275 270 Volume of Domestic Interbank Money Market Transaction Trillions Rp (daily average) Million USD 16 500 12 400 300 8 200 4 100 0 0 Jan'08 Apr'08 July'08 Oct'08 Jan'09 Apr'09 c. Inter-bank markets PUAB rate volatility has been smoothening and closing to the benchmark BI rate Transaction volumes have been trending upward enable banks to eliminate inter-bank market segmentation This helps ease systemic liquidity pressures in Rupiah in Foreign Currency
PresentationPlan Stylized Facts on Indonesian Financial Sector Post Crisis Banking Policy Response: Reasons behind the notable performance Vision of Future Supervisory Regime
Banking Policy Direction 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: Sub-optimal banking system structure Weak legal/regulatory and enforcements Feeble banks governance Weak risk managementand culture Sub-optimal infrastructure Absence of proper customer protection
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 regimeaccording to international standards 3. enhance the quality of supervisory system 4. strengthen the quality of bank management and operations 5. develop banking infrastructure 6. developeffective customer protection scheme 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 4. Promotion of Risk Culture and Risk Management 5. GCG implementation 6. Credit Bureau 7. Customer and Deposits protection scheme 8. Financial Stability Surveillance and Crisis Management Protocol 17
PresentationPlan Financial Supervisory Challenges in Indonesia
Challenges in Supervisory Function(1/2) Challenges 1. Information Gapamong financial supervisors Issues Transparency needs to be improved; Information gap among regulators in Indonesia needs to close 2. RegulatoryArbitrageamong markets Banks have been highly regulated 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 Needto strengthen prudential enforcement
Challenges in Supervisory Function(2/2) Challenges 4. Stability vs Efficiency: Regulatory Forbearance Issues 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 prudentialpolicy without a well designed policy and clear objectives on access for the poor/unbanked people nationally 5. Crisis Management Protocol CMP has been based on MOU (Emergency Law). Clearmandate and accountability is needed, in particular when dealing with systemic/crisis situations
PresentationPlan Stylized Facts on Indonesian Financial Sector Supervisory Regime in Indonesia Future Financial Supervisory Regime in Indonesia?
Future Global Financial System Post-crisis, financial system may have the following characteristics: Global financial integration goes onwith 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 intermediation Butmarket players will tend to focus more on counterparty risks Regulators will focus more on systemic risksand there are needs to have a stronger financial stability standards More banking consolidation
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: 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 community and investors
Future Financial Policy : A pragmatic approach Current Financial System Support for equitable development 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 allocate resources, esp. to SMEs 3. However, it bears costs. It may increase the risk of instability in the financial system; Future Financial System More Stability More Efficiency