Financial Services Authority Regulation Number 2/POJK.03/2018 on the Determination of Systemically Important Banks and Capital Surcharge

COPY
FINANCIAL SERVICES AUTHORITY REGULATION
NUMBER 2/POJK.03/2018
ON
THE DETERMINATION OF SYSTEMIC BANKS AND CAPITAL SURCHARGE BY THE GRACE OF THE ALMIGHTY GOD, THE BOARD OF COMMISSIONERS OF THE FINANCIAL SERVICES AUTHORITY, Considering:
a. that in order to identify banks that have a significant impact on the domestic financial system, a methodology is needed to determine systemic banks with reference to international standards; b. that risks originating from systemic banks need to be mitigated through the determination of capital surcharge based on the level of systemic impact of the bank on the domestic financial system;
c. that based on the considerations referred to in letters a and b, it is necessary to establish a Financial Services Authority Regulation on the Determination of Systemic Banks and Capital Surcharge;
Recalling:

1. Law Number 7 of 1992 concerning Banking (State Gazette of the Republic of Indonesia Year 1992 Number 31, Supplement to the State Gazette of the Republic of Indonesia Number 3472) as amended by Law Number 10 of 1998 concerning Amendments to Law Number 7 of 1992 concerning Banking (State Gazette of the Republic of Indonesia Year 1998 Number 182, Supplement to the State Gazette of the Republic of Indonesia Number 3790);
2. Law Number 21 of 2008 concerning Sharia Banking (State Gazette of the Republic of Indonesia Year 2008 Number 94, Supplement to the State Gazette of the Republic of Indonesia Number 4867);
3. Law Number 21 of 2011 concerning the Financial Services Authority (State Gazette of the Republic of Indonesia Year 2011 Number 111, Supplement to the State Gazette of the Republic of Indonesia Number 5253);
4. Law Number 9 of 2016 concerning the Prevention and Handling of Financial System Crises (State Gazette of the Republic of Indonesia Year 2016 Number 70, Supplement to the State Gazette of the Republic of Indonesia Number 5872);
   DECIDING:
   Establishing: FINANCIAL SERVICES AUTHORITY REGULATION ON THE DETERMINATION OF SYSTEMIC BANKS AND CAPITAL SURCHARGE.

CHAPTER I
GENERAL PROVISIONS
Article 1
In this Financial Services Authority Regulation:

1. Bank means a Universal Bank as referred to in Law Number 7 of 1992 concerning Banking as amended by Law Number 10 of 1998 concerning Amendments to Law Number 7 of 1992 concerning Banking, and a Universal Sharia Bank as referred to in Law Number 21 of 2008 concerning Sharia Banking.
2. Systemic Bank means a Bank that, due to its asset size, capital, and liabilities; the breadth of its network or complexity of transactions for banking services; and its interconnection with other financial sectors, can cause the failure of part or all of other Banks or financial service sectors, both operationally and financially, if that Bank experiences disturbance or failure.
3. Capital Surcharge is additional capital that functions to reduce negative impacts on the stability of the financial system and the economy in the event of a Systemic Bank's failure by increasing the Bank's ability to absorb losses.

Article 2
(1) The Financial Services Authority determines Systemic Banks and Capital Surcharge.
(2) In determining Systemic Banks and Capital Surcharge as referred to in paragraph (1), the Financial Services Authority coordinates with Bank Indonesia.
(3) The determination of Systemic Banks and Capital Surcharge as referred to in paragraph (1) is conducted every semester on:
a. March using data from the position in December of the previous year; and b. September using data from the position in June of the current year.

Article 3
Banks designated as Systemic Banks are required to establish Capital Surcharge.

Article 4
The Financial Services Authority submits written notification to Banks designated as Systemic Banks and the amount of Capital Surcharge as referred to in Article 2 paragraph (1).

CHAPTER II
METHODOLOGY FOR DETERMINING SYSTEMIC BANKS
Article 5
(1) In determining Systemic Banks, the Financial Services Authority formulates a methodology for determining Systemic Banks.
(2) The methodology for determining Systemic Banks as referred to in paragraph (1) uses indicators:
a. Bank size (size); b. complexity of business activities (complexity); and
c. interconnection with the financial system (interconnectedness).
(3) The methodology for determining Systemic Banks as referred to in paragraph (1) is used in the determination of Systemic Banks every semester as referred to in Article 2 paragraph (3). (4) The Financial Services Authority reviews the methodology for determining Systemic Banks as referred to in paragraph (1) at least once (1) every three (3) years.

Article 6
The Bank size indicator (size) as referred to in Article 5 paragraph (2) letter a is measured from the Bank's total exposure.

Article 7
The complexity of business activities indicator (complexity) as referred to in Article 5 paragraph (2) letter b consists of sub-indicators:
a. notional value of spot and over-the-counter derivatives; b. securities traded and available for sale but excluding securities that are used as high-quality liquid assets in the calculation of the liquidity ratio;
c. domestic indicators that are specific, determined by the Financial Services Authority; and
d. substitutability of the Bank's role in payment system activities and custody.

Article 8
The interconnection with the financial system indicator (interconnectedness) as referred to in Article 5 paragraph (2) letter c consists of sub-indicators:
a. financial assets in the form of claims or placements with financial service institutions (intra-financial system assets); b. financial liabilities to financial service institutions (intra-financial system liabilities); and
c. book value of securities issued by the Bank.

Article 9
Based on the indicators as referred to in Article 5 paragraph (2), the Financial Services Authority determines the Bank's systemic importance score (systemic importance score) and the threshold as the basis for determining Systemic Banks.

CHAPTER III
CAPITAL SURCHARGE
Article 10
(1) The Financial Services Authority determines Capital Surcharge in 5 (five) groups (buckets).
(2) The amount of Capital Surcharge in each group (bucket) is determined:
a. 1.0% (one point zero percent) of Risk-Weighted Assets (RWA) for Systemic Banks classified in group (bucket) 1 (one); b. 1.5% (one point five percent) of RWA for Systemic Banks classified in group (bucket) 2 (two);
c. 2.0% (two point zero percent) of RWA for Systemic Banks classified in group (bucket) 3 (three);
d. 2.5% (two point five percent) of RWA for Systemic Banks classified in group (bucket) 4 (four); and e. 3.5% (three point five percent) of RWA for Systemic Banks classified in group (bucket) 5 (five). (3) Capital Surcharge as referred to in paragraph (2) must be fulfilled using Common Equity Tier 1 capital. (4) The Financial Services Authority has the authority to review and adjust the determination of the amount and timing of fulfillment of Capital Surcharge, considering economic conditions and financial system stability.

Article 11
(1) In the event that there are Banks with a systemic importance score that cannot be classified into group (bucket) 1 (one) through group (bucket) 4 (four), the Financial Services Authority determines:
a. to classify such Systemic Banks into group (bucket) 5 (five); and b. to establish 1 (one) group (bucket) above group (bucket) 5 (five).
(2) The Financial Services Authority determines 1 (one) higher group (bucket) for each time there is a Systemic Bank designated in the highest previous group (bucket). (3) For each addition of 1 (one) group (bucket) as referred to in paragraph (1) and paragraph (2), the amount of Capital Surcharge as referred to in Article 10 paragraph (2) is determined to increase by 1% (one percent) of RWA.

Article 12
The establishment of Capital Surcharge as referred to in Article 3 is fulfilled progressively:

1. for Systemic Banks classified in group (bucket) 1 (one), amounting to:
   a. 0.75% (zero point seven five percent) of RWA since this Financial Services Authority Regulation takes effect; and b. 1.0% (one point zero percent) of RWA since January 1, 2019;
2. for Systemic Banks classified in group (bucket) 2 (two), amounting to:
   a. 1.125% (one point one two five percent) of RWA since this Financial Services Authority Regulation takes effect; and b. 1.5% (one point five percent) of RWA since January 1, 2019;
3. for Systemic Banks classified in group (bucket) 3 (three), amounting to:
   a. 1.5% (one point five percent) of RWA since this Financial Services Authority Regulation takes effect; and b. 2.0% (two point zero percent) of RWA since January 1, 2019;
4. for Systemic Banks classified in group (bucket) 4 (four), amounting to:
   a. 1.875% (one point eight seven five percent) of RWA since this Financial Services Authority Regulation takes effect; and b. 2.5% (two point five percent) of RWA since January 1, 2019;
5. for Systemic Banks classified in group (bucket) 5 (five), amounting to 3.5% (three point five percent) since January 1, 2019.

Article 13
(1) Banks that, at the time designated as Systemic Banks, cannot fulfill the obligation to fulfill Capital Surcharge as referred to in Article 12, are required to submit a Capital Surcharge fulfillment plan to the Financial Services Authority. (2) Banks are required to submit the Capital Surcharge fulfillment plan as referred to in paragraph (1) at the latest 14 (fourteen) working days since the written notification as referred to in Article 4. (3) The Capital Surcharge fulfillment plan as referred to in paragraph (1) is submitted to:
a. the Department of Supervision of the Relevant Bank, the Department of Sharia Banking, or the Regional Office of the Financial Services Authority in Jakarta, for Banks headquartered in the Jakarta Special Capital Region Province; or b. the Regional Office of the Financial Services Authority or the local Office of the Financial Services Authority, according to the area where the Bank's headquarters is located.

CHAPTER IV
SANCTIONS
Article 14
Banks designated as Systemic Banks that do not fulfill the obligation to establish Capital Surcharge as referred to in Article 3 in accordance with the Capital Surcharge fulfillment plan are subject to administrative sanctions in the form of:
a. written reprimand; b. prohibition on expanding business activities;
c. suspension of certain business activities;
d. prohibition on opening office networks; e. downgrade of the Bank's health level; and/or f. listing of management and/or shareholders of financial service institutions in the list of persons prohibited from becoming shareholders and management of financial service institutions in accordance with applicable laws and regulations regarding the fit and proper test.

Article 15
Banks that do not fulfill the provisions for submitting the Capital Surcharge fulfillment plan as referred to in Article 13 paragraph (1) and Article 13 paragraph (2) are subject to administrative sanctions in the form of a fine of Rp1,000,000.00 (one million rupiah) for each working day of delay or at most Rp50,000,000.00 (fifty million rupiah).

CHAPTER V
TRANSITIONAL PROVISIONS
Article 16
The determination of Systemic Banks and Capital Surcharge conducted before this Financial Services Authority Regulation takes effect is declared to remain valid until the submission of written notification by the Financial Services Authority as referred to in Article 4.

CHAPTER VI
CLOSING PROVISIONS
Article 17
At the time this Financial Services Authority Regulation takes effect, Financial Services Authority Regulation Number 46/POJK.03/2015 concerning the Determination of Systemically Important Banks and Capital Surcharge (State Gazette of the Republic of Indonesia Year 2015 Number 372, Supplement to the State Gazette of the Republic of Indonesia Number 5812) is revoked and declared invalid.

Article 18
This Financial Services Authority Regulation takes effect upon being promulgated.

This copy is consistent with the original
Legal Director 1
Legal Department signed
Yuliana

In order that everyone may know it, ordering the promulgation of this Financial Services Authority Regulation by placing it in the State Gazette of the Republic of Indonesia. Established in Jakarta on March 26, 2018 CHAIRMAN OF THE BOARD OF COMMISSIONERS FINANCIAL SERVICES AUTHORITY, signed WIMBOH SANTOSO

Promulgated in Jakarta on March 26, 2018
MINISTER OF LAW AND HUMAN RIGHTS
REPUBLIC OF INDONESIA, signed
YASONNA H. LAOLY
STATE GAZETTE OF THE REPUBLIC OF INDONESIA YEAR 2018 NUMBER 35

EXPLANATION
OF
FINANCIAL SERVICES AUTHORITY REGULATION
NUMBER 2/POJK.03/2018
ON
THE DETERMINATION OF SYSTEMIC BANKS AND CAPITAL SURCHARGE

I. GENERAL
The determination of Systemic Banks in the domestic financial market aims to identify Banks that have a significant impact on the domestic financial system. Thus, a methodology is needed to assess the systemic level of a Bank domestically that reflects the adverse effect that potentially occurs in the event of a Systemic Bank's failure. Risks originating from Systemic Banks are mitigated through the determination of Capital Surcharge based on the level of systemic impact of the Bank on the domestic financial system. The determination of Capital Surcharge is part of supervisory actions taken under normal conditions. In light of this, it is necessary to regulate again the determination of systemic banks and Capital Surcharge.

II. ARTICLE BY ARTICLE
Article 1
Sufficiently clear.

Article 2
Paragraph (1)
The determination of Banks as Systemic Banks does not cover branches of banks located outside the country.
Paragraph (2)
Sufficiently clear.
Paragraph (3)
Sufficiently clear.

Article 3
Sufficiently clear.

Article 4
Sufficiently clear.

Article 5
Paragraph (1)
The methodology for determining Systemic Banks refers to international standards regarding the determination of Systemic Banks.
Paragraph (2)
Sufficiently clear.
Paragraph (3)
Sufficiently clear.
Paragraph (4)
Sufficiently clear.

Article 6
The term "Bank's total exposure" refers to the sum of:
a. exposure on the balance sheet, namely total assets after deducting inter-office items; b. exposure on the administrative account, namely total commitment and contingent liabilities; and
c. potential future exposure from derivative transactions. The calculation of potential future exposure from derivative transactions refers to the Financial Services Authority's regulations regarding guidelines for calculating net charges for derivative transactions in the calculation of Risk-Weighted Assets (RWA) for credit risk using the standard approach.
Derivative transactions in Universal Sharia Banks are Sharia hedging transactions referring to the Financial Services Authority's regulations regarding the calculation of RWA for credit risk using the standard approach for universal Sharia banks.

Article 7
Letter a
Notional value of over-the-counter derivatives For Universal Sharia Banks, namely the notional value of Sharia hedging over-the-counter derivatives referring to the Financial Services Authority's regulations regarding the calculation of RWA for credit risk using the standard approach for universal Sharia banks. Letter b Sufficiently clear. Letter c The term "specific domestic indicator" at least covers:

1. outstanding value of bank guarantees;
2. outstanding value of irrevocable Letters of Credit;
3. book value of portfolios of Government Securities and/or Sharia Government Securities owned;
4. number of third-party funds accounts;
5. number of credit accounts or financing accounts; and
6. number of domestic and foreign branches.
   Letter d
   Sufficiently clear.

Article 8
Sufficiently clear.

Article 9
The term "Bank's systemic importance score (systemic importance score)" is a value that reflects the systemic level of a Bank.
The term "threshold" is the minimum systemic importance score (systemic importance score) of a Bank included in the category of Systemic Banks.

Article 10
Paragraph (1)
In the first determination after this Financial Services Authority Regulation takes effect, there are no Systemic Banks classified in group (bucket) 5 (five). Paragraph (2) Sufficiently clear. Paragraph (3) The term "Common Equity Tier 1 capital" refers to Common Equity Tier 1 capital as referred to in the Financial Services Authority's regulations regarding minimum capital provision requirements for conventional universal banks or universal Sharia banks. Paragraph (4) Considerations for reviewing and adjusting the determination of the amount and timing of fulfillment of Capital Surcharge are based on economic growth, credit growth, and/or the performance of the banking industry.

Article 11
Paragraph (1)
Letter a
Sufficiently clear.
Letter b.
There are no Systemic Banks designated in the new group (bucket) in this letter.
As an example, in the event that there are Banks with a systemic importance score that exceeds the range of systemic importance scores in group (bucket) 4 (four) so that they are classified into group (bucket) 5 (five), the Financial Services Authority determines:
a. the addition of the classification of Systemic Banks, namely group (bucket) 6 (six); and b. there are no Systemic Banks classified in group (bucket) 6 (six). Paragraph (2) The mechanism for adding the next group (bucket) refers to the example as referred to in paragraph (1) letters a and b. Paragraph (3) As an example, if the amount of Capital Surcharge for group (bucket) 5 (five) is 3.5% (three point five percent) of RWA, then the Capital Surcharge for group (bucket) 6 (six) is determined to be 4.5% (four point five percent) of RWA.

Article 12
Sufficiently clear.

Article 13
Sufficiently clear.

Article 14
Sufficiently clear.

Article 15
Sufficiently clear.

Article 16
Sufficiently clear.

Article 17
Sufficiently clear.

Article 18
Sufficiently clear.
SUPPLEMENT TO THE STATE GAZETTE OF THE REPUBLIC OF INDONESIA NUMBER 6190