Circular Letter of the Financial Services Authority Number 13/SEOJK.03/2015 Regarding Risk-Weighted Asset Calculation for Operational Risk Using the Basic Indicator Approach for Islamic Commercial Banks

To:
The Board of Directors of Islamic Commercial Banks

COPY

CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY NUMBER 13/SEOJK.03/2015

REGARDING

RISK-WIGHTED ASSET CALCULATION FOR OPERATIONAL RISK USING THE BASIC INDICATOR APPROACH FOR ISLAMIC COMMERCIAL BANKS

In light of the implementation of the Financial Services Authority Regulation Number 21/POJK.03/2014 concerning Minimum Capital Provision Requirements for Islamic Commercial Banks (State Gazette of the Republic of Indonesia Year 2014 Number 352, Supplement to the State Gazette of the Republic of Indonesia Number 5630), it is necessary to further regulate the implementation of the Risk-Weighted Asset (RWA) calculation for Operational Risk using the Basic Indicator Approach (BIA) for Islamic Commercial Banks in a Circular Letter of the Financial Services Authority, as follows:

I. GENERAL

1. To encourage the creation of a healthy banking system capable of competing nationally and internationally, a bank capital structure is needed to absorb risks faced in accordance with applicable international standards.

2. Referring to applicable international standards, operational risk is one of the risks that must be considered in the capital adequacy calculation besides credit risk, market risk, and other material risks.

3. Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events.

4. Operational Risk is one of the risks that banks must consider in calculating RWA for the Minimum Capital Provision Requirement (KPMM). Therefore, as regulated in Article 30 of the Financial Services Authority Regulation Number 21/POJK.03/2014 concerning Minimum Capital Provision Requirements for Islamic Commercial Banks, banks must calculate RWA for Operational Risk in the KPMM calculation using:
   a. Basic Indicator Approach (BIA); b. Standardized Approach; and/or
   c. More complex approaches (Advanced Measurement Approach).

5. For initial implementation, the RWA calculation for Operational Risk must be done using the Basic Indicator Approach (BIA).

II. RWA CALCULATION FOR OPERATIONAL RISK USING BIA

1. The RWA calculation for Operational Risk in the KPMM calculation using BIA as referred to in item I.5 is performed using the following formula:

RWA for Operational Risk = 12.5 x Operational Risk Capital Charge.

The Operational Risk Capital Charge refers to the average of the sum of positive annual gross income (January-December) in the last 3 (three) years multiplied by 15% (fifteen percent).

The Operational Risk Capital Charge calculation is performed using the following formula:

K_BIA = [ ∑(GI 1...n x α) ] / n

With the following explanations:
K_BIA = Operational Risk Capital Charge using BIA GI = positive annual gross income in the last three years n = number of years where gross income is positive α = 15% (fifteen percent)

Example: (in Millions of Rp)
Bank A | 2014 | 2013 | 2012 | 2011 | 2010
Gross Income | 750 | 3,000 | 2,250 | 1,750 | 2,500

Based on the data above, the gross income for calculating RWA for Operational Risk at the 2015 position is as follows:

RWA for Operational Risk
= 12.5 x Operational Risk Capital Charge
= 12.5 x [15% x {(Rp750,000,000.00 + Rp3,000,000,000.00 + Rp2,250,000,000.00)/3}] = Rp3,750,000,000.00

2. Gross income calculation is subject to the following provisions:

a. Gross income is income from net fund disbursement plus other specific net operational income, calculated cumulatively from the beginning of January to the end of December each year. The method of calculating gross income is as stated in the Appendix of this Financial Services Authority Circular Letter.

b. The method of calculating gross income as contained in the Appendix of this Financial Services Authority Circular Letter uses data submitted through the Monthly Report of Islamic Commercial Banks and Islamic Business Units - Monetary and Financial System Stability Report (LBUS UUS - LSMK) in effect. In the event of changes in the LBUS reporting system such as in 2013 (LBUS UUS - LSMK), banks use gross income according to the old LBUS (year 2003) in effect in the relevant year.

c. If based on audited Financial Statements by a Public Accounting Firm (KAP) there are corrections to the amount of gross income, the bank must correct the RWA calculation for Operational Risk in the month following the submission of the audited financial statements by the KAP to the bank.

Example:
A bank calculates RWA for Operational Risk for January and February 2015 based on gross income from 2012, 2013, and 2014 (unaudited). In early March 2015, the audited 2014 Financial Statements by the Public Accounting Firm (KAP) were submitted to the bank. Based on this report, the bank calculates RWA for Operational Risk for March 2015 based on gross income from 2012, 2013, and 2014 (audited).

d. If in calculating the average gross income over the last 3 (three) years, the bank experienced negative or zero gross income in 1 (one) or 2 (two) years, then for the calculation of average annual gross income as referred to in item 1, the bank must exclude the negative gross income value from the numerator and denominator when calculating the average gross income.

Example: (in Millions of Rp)
Bank A | 2014 | 2013 | 2012 | 2011 | 2010
Gross Income | 800 | 1,200 | (750) | (1,750) | 3,000

Based on the data above, the gross income for calculating RWA for Operational Risk is as follows:

1. For the 2015 position:
   RWA for Operational Risk
   = 12.5 x Operational Risk Capital Charge
   = 12.5 x [15% x {(Rp800,000,000.00 + Rp1,200,000,000.00)/2}] = Rp1,875,000,000.00

2. For the 2014 position:
   RWA for Operational Risk
   = 12.5 x Operational Risk Capital Charge
   = 12.5 x [15% x {(Rp1,200,000,000.00)/1}]
   = Rp2,250,000,000.00

e. If in the last 3 (three) years the bank experienced negative or zero gross income, then for the calculation of average annual gross income as referred to in item 1, the bank must calculate the Operational Risk Capital Charge using the last positive annual gross income.

Example: (in Millions of Rp)
Bank A | 2014 | 2013 | 2012 | 2011 | 2010
Gross Income | (1,250) | (1,500) | (750) | 1,800 | 2,750

Based on the data above, the gross income for calculating RWA for Operational Risk at the 2015 position is as follows:

RWA for Operational Risk
= 12.5 x Operational Risk Capital Charge
= 12.5 x [15% x {(Rp1,800,000,000.00)/1}]
= Rp3,375,000,000.00

3. Newly established banks, banks resulting from mergers, or banks resulting from consolidations are not required to calculate RWA for Operational Risk until the end of December of the year of establishment, merger, or consolidation. For the following year, banks must calculate the capital charge for Operational Risk using gross income during the initial year of establishment annualized.

Example:

a. Several banks merged into Bank A, which effectively operated since April 15, 2014. At the end of December 2014, Bank A's total gross income was Rp750,000,000.00 (seven hundred fifty million rupiah). Based on the above regulation, Bank A is not required to calculate RWA for Operational Risk until the end of its establishment year (2014). During 2015, starting from January 2015, Bank A calculates RWA for Operational Risk as follows:

RWA for Operational Risk
= 12.5 x Operational Risk Capital Charge
= 12.5 x [15% x {Rp750,000,000.00 x 12/9}]
= Rp1,875,000,000.00

b. Bank B was established and began operations on December 19, 2014. Total gross income of Bank B until December 31, 2014 was Rp100,000,000.00 (one hundred million rupiah). Based on the above regulation, Bank B is not required to calculate RWA for Operational Risk until the end of its establishment year (December 2014). During 2015, starting from January 2015, Bank B calculates RWA for Operational Risk as follows:

RWA for Operational Risk
= 12.5 x Operational Risk Capital Charge
= 12.5 x [15% x {Rp100,000,000.00 x 12/1}]
= Rp2,250,000,000.00

III. OTHERS

The Appendix regarding the Method of Calculating Gross Income in the Context of Calculating RWA for Operational Risk is an integral part of this Financial Services Authority Circular Letter.

IV. CLOSING

This Financial Services Authority Circular Letter takes effect on the date of determination.

To ensure everyone is aware, this Financial Services Authority Circular Letter is ordered to be announced by placing it in the State Gazette of the Republic of Indonesia.

Determined in Jakarta
On April 27, 2015

EXECUTIVE HEAD OF BANKING SUPERVISOR
FINANCIAL SERVICES AUTHORITY,
Signed,
NELSON TAMPUBOLON

STATE GAZETTE OF THE REPUBLIC OF INDONESIA YEAR 2015 NUMBER 35 DATE APRIL 30, 2015

Copy in accordance with the original
Director of Legal Affairs I
Legal Department,
Signed,
Sudarmaji

APPENDIX
CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY NUMBER 13/SEOJK.03/2015

REGARDING

RISK-WIGHTED ASSET CALCULATION FOR OPERATIONAL RISK USING THE BASIC INDICATOR APPROACH FOR ISLAMIC COMMERCIAL BANKS

Method of Calculating Gross Income in the Context of Calculating RWA for Operational Risk

Position:
2014* | 2013* | 2012*
(Jan - Dec) | (Jan - Dec) | (Jan - Dec)

Gross Income
1.a Income from fund disbursement | 101 | 1000 1.b Profit sharing for investment fund owners | 150 | 1500 1.c Fees paid to Bank Indonesia | n/a | 3005 1.d Wadiah deposit bonus | 185 - 192 | 3010 - 3050 1 Net Income from fund disbursement (1.a - 1.b - 1.c - 1.d)

2.a Income of the Bank as mudharib in mudharabah muqayadah | 137 | 2050 2.b Income from participation, fees/commissions/provisions | 138 - 144 | 2060 - 2130 2.c Profit from spot and forward transactions | n/a | 2035 - 2040 2.d Increase in fair value of securities measured at fair value through profit/loss | n/a | 2010 2.e Profit from sale of securities measured at fair value through profit/loss | n/a | 2020 2.f Other income from non-disbursement | 149 | 2190 2 Total Non-disbursement Operational Income (∑ 2.a ...2.f)

3.a Loss from participation and commission/provision expenses | 200 | 3100 - 3150 3.b Loss from spot and forward transactions | n/a | 3080 - 3090 3.c Decrease in fair value of securities measured at fair value through profit/loss | 390 | 3060 3.d Loss from sale of securities measured at fair value through profit/loss | n/a | 3065 3 Total Non-disbursement Operational Expenses (∑ 3.a ...3.d)

A. Gross Income (1 + 2 - 3)
B. Average Gross Income (∑ A1...A3 / n)
C. Capital Charge for Operational Risk (15% X B)
D. RWA for Operational Risk (12.5 X C)

Explanation:

• : gross income calculation period adjusted to the RWA calculation period for operational risk
  : n is the number of years where gross income is positive

LBUS Code
UUS (LSMK)
LBUS Old Code
Account
Period

Determined in Jakarta
On April 27, 2015

EXECUTIVE HEAD OF BANKING SUPERVISOR
FINANCIAL SERVICES AUTHORITY,
Signed,
NELSON TAMPUBOLON

Copy in accordance with the original
Director of Legal Affairs I
Legal Department,
Signed,
Sudarmaji