Circular Letter of the Financial Services Authority Number 26/SEOJK.03/2016 Regarding Minimum Capital Provision Requirements According to Risk Profile and Fulfillment of Capital Equivalency Maintained Assets

To:
The Board of Directors of Conventional Commercial Banks

COPY

CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY NUMBER 26 /SEOJK.03/2016

REGARDING
MINIMUM CAPITAL PROVISION REQUIREMENTS ACCORDING TO RISK PROFILE AND FULFILLMENT OF CAPITAL EQUIVALENCY MAINTAINED ASSETS

In connection with Financial Services Authority Regulation Number 11/POJK.03/2016 regarding Minimum Capital Provision Requirements for Commercial Banks (State Gazette of the Republic of Indonesia Year 2016 Number 25, Additional State Gazette of the Republic of Indonesia Number 5848), it is necessary to regulate implementation provisions regarding Minimum Capital Provision Requirements According to Risk Profile and Fulfillment of Capital Equivalency Maintained Assets in a Financial Services Authority Circular Letter as follows:

I. GENERAL PROVISIONS

1. The Bank's obligation to provide minimum capital according to its risk profile is not only intended to anticipate potential losses arising from Risk-Weighted Assets (RWA) which have taken into account Credit Risk, Market Risk, and Operational Risk, but also to anticipate potential future losses from risks that are not fully accounted for in RWA, such as concentration risk, liquidity risk, interest rate risk in the banking book, legal risk, compliance risk, reputational risk, and strategic risk, as well as to anticipate the impact of stress testing scenarios on the Bank's capital adequacy.

2. In fulfilling the obligation to provide minimum capital according to the risk profile, both individually and in consolidation with Subsidiary Companies, the Bank is required to have and apply an internal capital adequacy assessment process or Internal Capital Adequacy Assessment Process (ICAAP) as referred to in the Financial Services Authority Regulation regarding minimum capital provision requirements for commercial banks.

3. Branch offices of banks located outside the country, in addition to being required to provide minimum capital according to the risk profile, are also required to fulfill the minimum Capital Equivalency Maintained Assets (CEMA) as referred to in the Financial Services Authority Regulation regarding minimum capital provision requirements for commercial banks, to strengthen capitalization in order to maintain overall financial system stability and the banking sector in particular.

II. MINIMUM CAPITAL PROVISION REQUIREMENTS ACCORDING TO RISK PROFILE

A. Internal Capital Adequacy Assessment Process (ICAAP)

1. ICAAP is a process conducted by the Bank to determine capital adequacy according to the Bank's risk profile and to set strategies to maintain capital levels.

2. ICAAP components must at least include:

a. Active supervision by the Board of Directors and Board of Commissioners, at least including:

1. The Board of Directors and Board of Commissioners are responsible for:

a) understanding the nature and level of risks faced by the Bank, assessing the adequacy of risk management quality, and linking the risk level with the capital adequacy held by the Bank to anticipate risks faced and to support the Bank's business plans and strategic plans for the future; and

b) ensuring the consistent and integrated implementation of ICAAP in the Bank's operational activities.

2. The Board of Directors has the authority and is responsible for at least:

a) formulating capital management policies, strategies, and procedures in accordance with the size, characteristics, business complexity, and risk level of the Bank, and ensuring the Bank consistently maintains adequate capital levels to anticipate the Bank's risks;

b) developing a framework to assess the level of risks faced by the Bank and processes that link the risk level with capital needs;

c) ensuring that the Bank's strategic plan includes a capital management strategy describing capital needs, anticipated capital expenditure, target capital levels to be achieved, and expected capital sources; and

d) ensuring that capital management strategies, policies, and procedures are communicated and implemented comprehensively (bank-wide).

3. The Board of Commissioners has the authority and is responsible for at least:

a) approving the Bank's capital management policies, strategies, and procedures;

b) reviewing the quality and effectiveness of capital management conducted by the Board of Directors; and

c) conducting periodic evaluations of the quality and effectiveness of capital management policies, strategies, and procedures, and making adjustments where necessary.

b. Capital adequacy assessment, at least including:

1. adequate policies and procedures to ensure that all risks are identified, measured, and reported periodically to the Board of Directors and Board of Commissioners. The types of risks and factors considered in the assessment of each risk refer to Financial Services Authority regulations governing the assessment of the Bank's health level, while the application of risk management such as identification and measurement processes refer to Financial Services Authority regulations governing the application of risk management for Banks;

2. methods and processes for conducting capital adequacy assessments by linking the risk level with the capital level needed to absorb potential losses from the relevant risks;

3. adjustment of methods and assumptions used in the event of changes in business plans, risk profiles, and external factors; and

4. documentation of risk measurement results and calculations of the required capital level, including methods and assumptions used.

c. Monitoring and reporting, at least including:

1. adequate information systems to monitor and report risk exposures and measure the impact of changes in the risk profile on the Bank's capital needs; and

2. risk profile and capital level reports submitted periodically to the Board of Directors and Board of Commissioners, which are used by the Board of Directors for:

a) evaluating the risk level, risk movement trends, and impacts on the capital level;

b) evaluating the fairness of methods as well as the sensitivity and fairness of assumptions used in measuring the risk level and assessing the Bank's capital adequacy;

c) determining the Bank's adequate capital availability according to the risk profile; and

d) measuring estimated future capital needs based on the latest risk profile assessment results and adjusting the Bank's strategic plan where necessary.

d. Internal control, at least including:

1. an adequate internal control system to ensure the reliability of the implemented ICAAP; and

2. periodic review of ICAAP at least once every 1 (one) year and as needed by the Bank, to ensure the reliability, accuracy, and fairness of the process. The review process is conducted by internal Bank parties with adequate competence and independence from the capital adequacy determination process. The scope of the ICAAP review must at least include:

a) the suitability of the capital adequacy assessment process with the size, characteristics, and business complexity of the Bank;

b) the accuracy and completeness of data used in the capital adequacy assessment process;

c) the fairness of methods and assumptions used in the capital adequacy assessment process; and

d) the fairness of stress testing scenarios used in the capital adequacy assessment process.

B. Supervisory Review and Evaluation Process (SREP)

1. SREP is a review process conducted by the Financial Services Authority over the Bank's ICAAP results.

2. SREP includes assessments of the adequacy of:

a. active supervision by the Board of Directors and Board of Commissioners;

b. capital adequacy assessment;

c. monitoring and reporting; and

d. internal control.

C. Calculation of Minimum Capital Provision Requirements According to Risk Profile

1. The Bank provides minimum capital according to the risk profile, both individually and in consolidation with Subsidiary Companies.

2. Minimum capital provision is set at a minimum of:

a. 8% (eight percent) of RWA, for Banks with Risk Profile Rating 1;

b. 9% (nine percent) up to less than 10% (ten percent) of RWA, for Banks with Risk Profile Rating 2;

c. 10% (ten percent) up to less than 11% (eleven percent) of RWA, for Banks with Risk Profile Rating 3; or

d. 11% (eleven percent) up to 14% (fourteen percent) of RWA, for Banks with Risk Profile Rating 4 or Rating 5.

3. Total RWA is the sum of RWA for Credit Risk, RWA for Market Risk, and RWA for Operational Risk.

4. The Financial Services Authority has the authority to set minimum capital higher than the minimum capital as stated in number 2, in the event that the Financial Services Authority assesses that the Bank faces potential losses requiring higher capital.

5. Some illustrations of minimum capital provision calculations according to the risk profile are as follows:

Illustration 1:
Bank A has total capital of IDR 130 billion and total RWA of IDR 1,300 billion, so Bank A's KPMM ratio is 10%. Bank A has a risk profile with Rating 2. Based on the ICAAP results and Financial Services Authority calculations, Bank A needs to provide minimum capital according to the risk profile at 9% of RWA.

Thus, Bank A is required to provide minimum capital according to the risk profile at 9% of IDR 1,300 billion or IDR 117 billion.

With Bank A's KPMM ratio of 10%, in this case, Bank A has met the minimum KPMM ratio requirement according to the risk profile of 9%.

Illustration 2:
Bank B has total capital of IDR 900 billion and total RWA of IDR 9,000 billion, so Bank B's KPMM ratio is 10%. Bank B has a risk profile with Rating 3. Based on ICAAP results, Bank B requires minimum capital of 10% of RWA, but based on Financial Services Authority assessment results, Bank B requires minimum capital of 11%, among others due to potential losses requiring higher capital.

Thus, Bank B is required to provide minimum capital according to the risk profile at 11% of IDR 9,000 billion or IDR 990 billion.

With Bank B's KPMM ratio of 10%, Bank B does not meet the minimum KPMM ratio requirement according to the risk profile, which is 11%. Bank B requires additional capital of at least IDR 990 billion minus IDR 900 billion or IDR 90 billion.

D. Reporting

1. The Bank submits reports on the assessment of minimum capital adequacy according to the risk profile to the Financial Services Authority referring to the format in Appendix I at least every semester for the end of June and end of December positions.

The report is submitted together with the submission of the bank's health level self-assessment results according to Financial Services Authority regulations governing the assessment of the Bank's health level.

2. The report as stated in number 1 is submitted to:

a. The Relevant Bank Supervision Department, for Banks headquartered or branch offices of banks located outside the country situated in the Special Capital Region of Jakarta; or

b. The Regional Office of the Financial Services Authority or the Local Financial Services Authority Office according to the area where the Bank's headquarters is located.

III. FULFILLMENT OF CAPITAL EQUIVALENCY MAINTAINED ASSETS

1. Capital Equivalency Maintained Assets (CEMA) is the allocation of branch office funds from banks located outside the country that must be placed in financial assets in specific amounts and requirements, as regulated in the Financial Services Authority Regulation regarding minimum capital provision requirements for commercial banks.

2. Financial assets used as CEMA must be free from claims by any party, evidenced among others by a statement letter from the branch office of the bank located outside the country, prepared in the format contained in Appendix II.

3. Minimum CEMA is set at 8% (eight percent) of the total liabilities of the bank located outside the country every month and at least IDR 1,000,000,000,000.00 (one trillion rupiah).

4. Fulfillment of minimum CEMA as stated in number 3 is done:

a. up to the position of November 2017, minimum CEMA is set at 8% (eight percent) of the total liabilities of the branch office of the bank located outside the country every month; and

b. starting from the position of December 2017, minimum CEMA is set at 8% (eight percent) of the total liabilities of the branch office of the bank located outside the country every month and at least IDR 1,000,000,000,000.00 (one trillion rupiah).

5. Reports on the fulfillment of minimum CEMA are submitted every month at the latest on the 8th of the following month after the end of the reporting month.

Example:

The May 2016 CEMA fulfillment report is submitted at the latest on June 8, 2016.

6. The report on the fulfillment of minimum CEMA as stated in number 5 is submitted to the Relevant Bank Supervision Department, for branch offices of banks located outside the country situated in the Special Capital Region of Jakarta.

7. The CEMA fulfillment report is prepared with reference to Appendix III.

IV. OTHER PROVISIONS

Appendices I to III are an integral part of this Financial Services Authority Circular Letter.

V. CLOSING PROVISIONS

Upon the commencement of this Financial Services Authority Circular Letter, Bank Indonesia Circular Letter Number 14/37/DPNP dated December 27, 2012 regarding Minimum Capital Provision Requirements According to Risk Profile and Fulfillment of Capital Equivalency Maintained Assets (CEMA) is revoked and declared invalid.

Provisions in this Financial Services Authority Circular Letter take effect on the date of establishment.

Established in Jakarta on July 14, 2016

EXECUTIVE HEAD OF BANKING SUPERVISOR
FINANCIAL SERVICES AUTHORITY, signed

NELSON TAMPUBOLON

Copy matches the original
Legal Director 1
Legal Department signed

Yuliana

APPENDIX I
CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY NUMBER 26 /SEOJK.03/2016 REGARDING MINIMUM CAPITAL PROVISION REQUIREMENTS ACCORDING TO RISK PROFILE AND FULFILLMENT OF CAPITAL EQUIVALENCY MAINTAINED ASSETS

KPMM CALCULATION REPORT ACCORDING TO RISK PROFILE

The KPMM Calculation Report according to the risk profile must at least include:

I. CAPITAL MANAGEMENT STRATEGY

This chapter must at least describe:

1. the Bank's capital composition; and

2. the capital management strategy which among others includes capital sources and capital planning to fulfill KPMM according to the risk profile and to support the Bank's business and strategic plans for the future.

II. IDENTIFICATION AND MEASUREMENT OF MATERIAL RISKS

This chapter must at least describe:

1. the identification and measurement of risk types assessed as material by the Bank; and

2. the methods and assumptions used.

The types of risks and factors considered in the assessment of each risk must at least refer to Financial Services Authority regulations regarding the assessment of the Bank's health level.

III. CAPITAL ADEQUACY ASSESSMENT

This chapter must at least describe the methods and processes for conducting capital adequacy assessments by linking the risk level with the capital level needed to absorb potential losses from the relevant risks.

IV. MINIMUM CAPITAL ACCORDING TO RISK PROFILE

This chapter must at least describe an executive summary of the risk profile self-assessment results and the results of the minimum capital calculation according to the risk profile.

Established in Jakarta on July 14, 2016

EXECUTIVE HEAD OF BANKING SUPERVISOR
FINANCIAL SERVICES AUTHORITY, signed

NELSON TAMPUBOLON

Copy matches the original
Legal Director 1
Legal Department signed

Yuliana

APPENDIX II
CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY NUMBER 26 /SEOJK.03/2016 REGARDING MINIMUM CAPITAL PROVISION REQUIREMENTS ACCORDING TO RISK PROFILE AND FULFILLMENT OF CAPITAL EQUIVALENCY MAINTAINED ASSETS

Format of Statement Letter from branch offices of banks located outside the country ---------------------------------LETTERHEAD------------------------------- STATEMENT LETTER

In accordance with Financial Services Authority Regulation Number ...

1. regarding Minimum
   Capital Provision Requirements for Commercial Banks and Financial Services Authority Circular Letter Number ...
2. regarding Minimum Capital Provision Requirements according to
   Risk Profile and Fulfillment of Capital Equivalency Maintained Assets, I, the undersigned:

Name :
Position :
Identity Number 2)
:
in accordance with authority based on... 3), acting for and on behalf of................
4) state that the Details of Capital Equivalency Maintained Assets (CEMA) Financial Assets as contained in the CEMA Fulfillment Report are free from any form of claims by any party.

If it turns out later that the above statement is not true, I am willing to make corrections and submit the correct report and am willing to be subject to sanctions in accordance with regulations.

This statement letter is made with full consciousness and without coercion from any party.

(....City....), (....date.....)

Sufficient Stamp and Signature
(Signatory Name)

Notes:

1. Filled in accordance with the number and date of applicable regulations.

2. In accordance with a photocopy of the Identity Card (KTP) or passport and/or Temporary Stay Permit Card (KITAS) or Permanent Stay Permit Card (KITAP) from the competent authority for foreign citizens.

3. Documents from the headquarters of the bank located outside the country granting the authority to act for and on behalf of the branch office of the bank located outside the country.

4. Name of the branch office of the bank located outside the country according to the license granted by the Financial Services Authority.

Established in Jakarta on July 14, 2016

EXECUTIVE HEAD OF BANKING SUPERVISOR
FINANCIAL SERVICES AUTHORITY, signed

NELSON TAMPUBOLON

Copy matches the original
Legal Director 1
Legal Department signed

Yuliana

APPENDIX III
CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY NUMBER 26 /SEOJK.03/2016 REGARDING MINIMUM CAPITAL PROVISION REQUIREMENTS ACCORDING TO RISK PROFILE AND FULFILLMENT OF CAPITAL EQUIVALENCY MAINTAINED ASSETS

GUIDELINES FOR PREPARING THE REPORT ON FULFILLMENT OF CAPITAL EQUIVALENCY MAINTAINED ASSETS (CEMA) MINIMUM

I. General

The Minimum CEMA Fulfillment Report prepared every month contains information regarding the average position of total liabilities, average total inter-office liabilities, average total liabilities as the basis for calculating minimum CEMA, a list of details of CEMA financial assets (asset type, asset name, issuer, asset rating, acquisition date, measurement category, maturity date, and asset value), and details of the Bank's liability positions.

II. Explanation of Report Details

A. Minimum CEMA Calculation

This section provides information related to the amount of minimum CEMA that must be fulfilled by the branch office of the bank located outside the country after calculating the average total liabilities of the bank over 1 (one) reporting period consisting of:

1. Average Total Liabilities

Average total liabilities is the weekly average of all bank liability positions during the reporting month period.

2. Average Total Inter-Office Liabilities

Average total inter-office liabilities is the weekly average of all inter-office liability positions during the reporting month period.

3. Average Total Liabilities as the Basis for Minimum CEMA Calculation

Average total liabilities as the basis for minimum CEMA calculation is the result of the calculation of average total liabilities minus the average total inter-office liabilities.

This calculation result is used as one of the factors in determining the minimum CEMA limit that must be maintained by the bank.

4. Percentage of Total Liabilities

Percentage of total liabilities is the calculation result of 8% (eight percent) against the average total liabilities.

5. IDR 1 Trillion Nominal Value

The nominal value of IDR 1 trillion is the value of IDR 1,000,000,000,000.00 (one trillion rupiah).

6. Minimum CEMA

Minimum CEMA is the CEMA that must be fulfilled by the Bank, which is 8% (eight percent) against the average total liabilities and at least IDR 1,000,000,000,000.00 (one trillion rupiah).

Up to the position of November 2017, minimum CEMA is set at 8% (eight percent) of the total liabilities of the branch office of the bank located outside the country every month.

Example:

1. Bank Y's total liabilities every week for June 2016 are IDR 10 trillion (Week I), IDR 15 trillion (Week II), IDR 10 trillion (Week III), and IDR 20 trillion (Week IV). The average total liabilities in June 2016 are IDR 55 trillion divided by 4, which is IDR 13.75 trillion.

Meanwhile, the average total inter-office liabilities in June 2016 are IDR 100 billion. Thus, the average total liabilities as the basis for minimum CEMA calculation are IDR 13.75 trillion minus IDR 100 billion, becoming IDR 13.65 trillion.

The minimum CEMA calculation is set at 8% against the average total liabilities and at least IDR 1 trillion. Considering that 8% of IDR 13.65 trillion is IDR 1.092 trillion and this value exceeds IDR 1 trillion, the minimum CEMA that must be fulfilled is IDR 1.092 trillion.

2. Bank Y's total liabilities every week for June 2016 are IDR 10 trillion (Week I), IDR 10 trillion (Week II), IDR 10 trillion (Week III), and IDR 10 trillion (Week IV). The average total liabilities in June 2016 are IDR 40 trillion divided by 4, which is IDR 10 trillion.

Meanwhile, the average total inter-office liabilities in June 2016 are IDR 1 trillion.

Thus, the average total liabilities as the basis for minimum CEMA calculation are IDR 10 trillion minus IDR 1 trillion, becoming IDR 9 trillion.

The minimum CEMA calculation is set at 8% against the average total liabilities and at least IDR 1 trillion. Considering that 8% of IDR 9 trillion is IDR 0.72 trillion and this value is smaller than IDR 1 trillion, the minimum CEMA that must be fulfilled is IDR 1 trillion with the following implementation stages:

a. Since the position of June 2016 up to the position of November 2017, in the event that the minimum CEMA of 8% against the average total liabilities is smaller than IDR 1 trillion, the minimum CEMA that must be fulfilled is 8% against the average total liabilities, which is 8% of IDR 9 trillion, namely IDR 0.72 trillion.

b. The obligation to fulfill minimum CEMA of at least IDR 1 trillion applies since the position of December 2017.

B. Details of CEMA Financial Assets

Contains information on all financial assets owned by the branch office of the bank located outside the country that meet the requirements as CEMA during the reporting period, consisting of:

1. Asset Type

Asset type is the type of financial asset used to fulfill CEMA, which consists of:

a. Indonesian Government Securities;

b. Bank Securities;

c. Corporate Securities.

2. Asset Name

Asset name is the specific name of the financial asset used to fulfill CEMA.

Example: SPN03130107, FR0063, Bond 1, Bond 2.

3. Issuer...

4. Issuer
   The Issuer is the name of the issuer of the financial assets used as CEMA.
   Example: Government of the Republic of Indonesia, PT Bank Z, Tbk, PT XYZ, Tbk.

5. Asset Rating
   Asset rating is the rating of assets issued by a rating agency in accordance with the regulations of the Financial Services Authority regarding recognized rating agencies and ratings. Asset ratings are only filled in for CEMA asset types other than Government Securities of the Republic of Indonesia.

6. Acquisition Date
   Acquisition Date is the date of purchase of financial assets by the Bank.

7. Measurement Category
   Measurement Category is the measurement category used for the financial assets in question, namely Available for Sale (AFS) or Hold to Maturity (HTM).

8. Maturity Date
   Maturity Date is the maturity date of the financial assets.

9. Asset Value
   Asset Value is the book value of the financial assets.

10. Total
    Total is the sum of all financial asset values used to fulfill CEMA obligations.

C. Details of Bank Liability Items
Contains information on the nominal amount of branch liability items of banks located outside the country for each end-of-week position according to the Bank's weekly balance sheet as regulated and submitted in the Periodic Report of Commercial Banks (LBBU) during the reporting period, consisting of:

1. Total Liabilities
   Total liabilities are the total liabilities at each end-of-week position in the reporting month period.

2. Total Inter-branch Liabilities
   Total inter-branch liabilities are the total inter-branch liabilities at each end-of-week position in the reporting month period.

3. Total Liabilities as the Basis for CEMA Minimum Calculation
   Total Liabilities as the basis for CEMA calculation is the total liabilities value minus the total inter-branch liabilities.

4. Total
   Total is the sum value of all rows in each column of total liabilities, total inter-branch liabilities, and total liabilities as the basis for CEMA minimum calculation.

5. Average
   Average is the average value during the reporting month period for each column of total liabilities, total inter-branch liabilities, and total liabilities as the basis for CEMA minimum calculation.

Format of the Capital Equivalency Maintained Assets (CEMA) Fulfillment Report Capital Equivalency Maintained Assets (CEMA) Fulfillment Report Bank Name : ………
Bank Code : .........
Reporting Period : Month …… Year .......

I. Calculation of Minimum CEMA
Liabilities

1. Average total liabilities = Rp
2. Average total inter-branch liabilities = Rp
3. Average total liabilities as = Rp
   basis for CEMA Minimum Calculation ((1)-(2))

Determination of Minimum CEMA
4. Percentage of total liabilities = Rp
( 8% x (3))
5. Nominal value of IDR 1 trillion = Rp1,000,000,000,000,-
6. Minimum CEMA (max{4,5}) = Rp

II. Details of CEMA Financial Assets
No. Type
Asset
Name
Asset
Issuer
(Issuer)
Asset
Rating
Acquisition
Date
Measurement
Category
Maturity date
Asset
Value
(1) (2) (3) (4) (5) (6) (7) (8)
Total (9)

III. Details of Bank Liability Items
Total Liabilities
(a)
Total Inter-branch
Liabilities
(b)
Total Liabilities As
Basis for CEMA Minimum
Calculation
(a-b)
(1) (2) (3)
Week I
Week II
Week III
Week IV
Total (4)
Average (5)

Determined in Jakarta on July 14, 2016
EXECUTIVE HEAD OF BANKING SUPERVISOR
FINANCIAL SERVICES AUTHORITY, signed
NELSON TAMPUBOLON

Copy in accordance with the original
Legal Director 1
Legal Department signed
Yuliana