Implementation of Consolidated Risk Management for Banks Controlling Subsidiaries

COPY
FINANCIAL SERVICES AUTHORITY REGULATION
NUMBER 38 /POJK.03/2017
CONCERNING
THE IMPLEMENTATION OF CONSOLIDATED RISK MANAGEMENT FOR BANKS THAT EXERCISE CONTROL OVER SUBSIDIARIES BY THE GRACE OF GOD THE ALMIGHTY THE COMMISSIONERS COUNCIL OF THE FINANCIAL SERVICES AUTHORITY, Considering: a. that the continuity of a bank's business is influenced by risk exposures arising both directly from the bank's business activities and indirectly from the business activities of its subsidiaries; b. that to manage such risk exposures, banks are required to implement consolidated risk management;
c. that in implementing consolidated risk management, banks must identify, measure, monitor, and control risks arising from the business activities of the bank and its subsidiaries;
d. that in implementing consolidated risk management, banks must ensure that the prudential principles applied to the bank's business activities are also applied to its subsidiaries; e. that the implementation of consolidated risk management for banks exercising control over subsidiaries is one of the principles of international standards;

f. that in relation to the transfer of functions, duties, and authorities for the regulation and supervision of financial services in the banking sector from Bank Indonesia to the Financial Services Authority, it is necessary to re-regulate the implementation of consolidated risk management for banks exercising control over subsidiaries; g. that based on the considerations as referred to in letters a through f, it is necessary to establish a Financial Services Authority Regulation concerning the Implementation of Consolidated Risk Management for Banks Exercising Control over Subsidiaries; 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 Islamic 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);
DECIDING:
Establishing: FINANCIAL SERVICES AUTHORITY REGULATION CONCERNING THE IMPLEMENTATION OF CONSOLIDATED RISK MANAGEMENT FOR BANKS EXERCISING CONTROL OVER SUBSIDIARIES.

CHAPTER I
GENERAL PROVISIONS
Article 1
In this Financial Services Authority Regulation, the following terms are defined as:

1. Bank means General 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, including branch offices of banks located abroad, and General Islamic Bank as referred to in Law Number 21 of 2008 concerning Islamic Banking.

2. Control means an individual, company, or entity, either alone or jointly, directly or indirectly, that holds 50% (fifty percent) of shares, or less than 50% (fifty percent) of shares but has voting rights in another company or entity but:
   a. there is an agreement with other shareholders, thereby having voting rights of more than 50% (fifty percent); b. has the authority to regulate the financial and operational policies of another company or entity based on the articles of association or agreement;
   c. has the authority to appoint or replace the majority of the board of directors and board of commissioners or other equivalent organs and control another company or entity through the board of directors and board of commissioners or other organs;
   and/or d. is able to control the majority of votes in the meeting of the board of directors and board of commissioners or other equivalent organs and control the company or entity through the board of directors and board of commissioners or other organs.

3. Subsidiary means a legal entity or company owned and/or controlled by a Bank directly or indirectly, both domestically and abroad, that meets the criteria as regulated in this Financial Services Authority Regulation.

4. Minimum Capital Requirement, hereinafter abbreviated as KPMM, is the KPMM as referred to in Financial Services Authority regulations concerning minimum capital requirements for general banks and Financial Services Authority regulations concerning minimum capital requirements for general Islamic banks.

5. Maximum Credit Limit, hereinafter abbreviated as BMPK, is the BMPK as referred to in statutory regulations concerning the maximum credit limit for general banks.
   Article 2
   (1) Banks that own and/or exercise Control over Subsidiaries are required to implement consolidated risk management.
   (2) The implementation of consolidated risk management as referred to in paragraph (1) does not apply to Subsidiaries owned and/or controlled by a Bank due to temporary capital participation in the context of credit restructuring or financing restructuring.
   Article 3
   Subsidiaries as referred to in Article 2 paragraph (1) are companies conducting business activities in the financial sector, consisting of:
   a. subsidiary company, meaning a Subsidiary with Bank ownership of more than 50% (fifty percent); b. participation company, meaning a Subsidiary with Bank ownership of 50% (fifty percent) or less but the Bank exercises Control over the company;
   c. companies with Bank ownership of more than 20% (twenty percent) up to 50% (fifty percent) that meet the requirements:

6. Bank ownership and ownership by other related parties in the Subsidiary are equal; and

7. each owner exercises Joint Control over the Subsidiary; and
   d. other entities that, based on financial accounting standards, are required to be consolidated.

CHAPTER II
INFORMATION SYSTEMS AND REPORTING
Article 4
(1) Banks are required to have a system capable of identifying, measuring, monitoring, and controlling business risks of the Bank and its Subsidiaries to effectively implement consolidated risk management. (2) The system required to be owned by the Bank as referred to in paragraph (1) must include at least:
a. accounting information systems; and b. risk management information systems.

CHAPTER III
ASSET QUALITY ASSESSMENT
Article 5
For the purpose of preparing consolidated financial statements and calculating KPMM, Banks are required to conduct asset quality assessments and form asset impairment allowances for all assets of its Subsidiaries at least in accordance with statutory regulations concerning asset quality assessment for general banks and Financial Services Authority regulations concerning asset quality assessment for general Islamic banks and Islamic business units.

CHAPTER IV
CALCULATION OF MAXIMUM CREDIT LIMIT
Article 6
(1) Banks are required to comply with statutory regulations concerning the maximum credit limit for general banks, both for the Bank's funding on an individual basis and for the Bank's and Subsidiaries' funding on a consolidated basis. (2) In the calculation of BMPK for the consolidated funding of the Bank and its Subsidiaries:
a. funding from the Subsidiary to the Bank's debtor must be calculated as one unit with the Bank's funding; and b. the capital component uses consolidated capital.
Article 7
Participations in Subsidiaries by Banks implementing consolidated risk management are not calculated as funding in the BMPK calculation.

CHAPTER V
MANAGEMENT OF SUBSIDIARIES
Article 8
(1) Banks are required to ensure that the managers managing the Subsidiaries have good integrity.
(2) The obligation as referred to in paragraph (1) does not apply to managers managing Subsidiaries as referred to in Article 3 letter c.
(3) In order to comply with the provisions as referred to in paragraph (1), Banks are required to submit a list of proposed candidate managers for the Subsidiaries to be presented at the General Meeting of Shareholders (GMS) to the Financial Services Authority. (4) The report as referred to in paragraph (3) must be submitted at the latest 10 (ten) working days before the implementation of the GMS.

CHAPTER VI
ASSESSMENT OF BANK HEALTH STATUS AND RISK PROFILE
Article 9
(1) Banks are required to conduct health status assessments both individually and on a consolidated basis.
(2) In the event of differences in the business characteristics of the Subsidiary compared to the Bank, certain components in the Bank's health status assessment may be adjusted for the consolidated health status assessment.
Article 10
(1) Banks are required to prepare and submit risk profile reports both individually and on a consolidated basis.
(2) In the event of differences in the business characteristics of the Subsidiary compared to the Bank, certain risk measurement parameters in the Bank's risk profile preparation may be adjusted for the consolidated risk profile preparation.

CHAPTER VII
DETERMINATION OF STATUS AND SUPERVISORY FOLLOW-UP OF BANKS
Article 11
The provisions of Financial Services Authority Regulations concerning the determination of status and supervisory follow-up for general banks are applied to Banks individually and to Banks on a consolidated basis.

CHAPTER VIII
REPORTING
Article 12
(1) Banks are required to submit Subsidiary financial reports online in accordance with the format and provisions established by the Financial Services Authority through the Financial Services Authority reporting system. (2) In the event that submission of reports through the Financial Services Authority reporting system as referred to in paragraph (1) cannot yet be performed, Banks submit reports online through the General Bank Monthly Report System, Monetary Stability and General Bank Monthly Financial System, General Bank Periodic Report, or General Islamic Bank and Islamic Business Unit Periodic Report, referring to statutory regulations. (3) In the event that online submission of reports as referred to in paragraph (1) and paragraph (2) cannot yet be performed, Banks are required to submit reports offline every quarter for the periods of March, June, September, and December, consisting of:
a. consolidated asset quality assessment reports; b. consolidated Maximum Fund Disbursement Limit (BMPD) calculation reports for general Islamic banks; and
c. consolidated risk profile reports as referred to in Article 10.
(4) Consolidated asset quality assessment reports and consolidated BMPD calculation reports for General Islamic Banks as referred to in paragraph (3) letters a and b must be submitted at the latest on the 15th of the second month following the end of the relevant reporting month. (5) In the event that the 15th falls on a Saturday, Sunday, or public holiday, the report is submitted on the preceding working day. (6) Consolidated risk profile reports as referred to in paragraph (3) letter c must be submitted at the latest 30 (thirty) days after the end of the reporting month. (7) The submission deadline for reports as referred to in paragraph (6) for general Islamic banks refers to Financial Services Authority regulations concerning the implementation of risk management for general Islamic banks and Islamic business units. (8) Reports as referred to in paragraph (3) are submitted by Banks to the Financial Services Authority at the address:
a. the Department of Supervision of the Relevant Bank or the Department of Islamic Banking, for Banks with headquarters or branch offices of banks located abroad in the Special Capital Region of Jakarta Province; or b. the Regional Office of the Financial Services Authority or the Local Financial Services Authority Office according to the region where the Bank's headquarters is located.

Article 13
(1) In the event that a Bank owns and/or controls a Subsidiary conducting insurance business activities:
a. the implementation of consolidated risk management as referred to in Article 2 paragraph (1) is conducted through the assessment and submission of risk management implementation reports for the insurance company separately; and b. the provisions as referred to in Article 5, Article 6, Article 7, Article 9, Article 10, and Article 12 are not applied. (2) The assessment report on the implementation of risk management for the insurance company as referred to in paragraph (1) letter a must be submitted quarterly for the periods of March, June, September, and December, at the latest 30 (thirty) days after the end of the reporting month. (3) The submission of the assessment report on the implementation of risk management for the insurance company as referred to in paragraph (2) refers to the provisions in Article 12 paragraph (8).

CHAPTER IX
OTHER PROVISIONS
Article 14
(1) Increases in participation due to the accumulation of Subsidiary profits by Banks implementing consolidated risk management are not calculated within the Bank's participation portfolio limits. (2) The provisions as referred to in paragraph (1) are not applied in the event that the Bank owns and/or controls a Subsidiary conducting insurance business activities.

CHAPTER X
SANCTIONS
Article 15
(1) Banks that do not comply with the provisions as referred to in Article 2 paragraph (1), Article 4, Article 5, Article 6, Article 8 paragraph (1), Article 8 paragraph (3), Article 8 paragraph (4), Article 9 paragraph (1), and/or Article 10 paragraph (1) are subject to sanctions in accordance with relevant statutory regulations and may be subject to administrative sanctions, consisting of:
a. written reprimand; b. suspension of certain business activities; and/or
c. inclusion of members of the board of directors, members of the board of commissioners, and/or shareholders of the Bank in the list of parties receiving the "Fail" status in the competency and propriety test as regulated in statutory regulations concerning the competency and propriety test (fit and proper test).
(2) Banks that submit reports as referred to in Article 12 paragraph (1), Article 12 paragraph (3), and Article 13 paragraph (2) after the final submission deadline as referred to in Article 12 paragraph (4), Article 12 paragraph (6), and Article 13 paragraph (2) up to 14 (fourteen) working days are subject to administrative sanctions in the form of a fine of Rp1,000,000.00 (one million rupiah) per working day of delay for each report. (3) Banks that have not submitted reports or submit reports after the final submission deadline as referred to in paragraph (2) are subject to administrative sanctions in the form of a fine of Rp50,000,000.00 (fifty million rupiah). (4) Banks that have not submitted reports after the final submission deadline as referred to in paragraph (2) remain obligated to submit the reports as referred to in Article 12 and Article 13 paragraph (2). (5) In the event that a Bank is subject to administrative sanctions in the form of a fine for failing to submit reports or submitting reports after the final deadline as referred to in paragraph (3), the administrative sanction in the form of a fine for late submission of reports as referred to in paragraph (2) is not applied.

CHAPTER XI
CLOSING PROVISIONS
Article 16
Further provisions concerning prudential principles and reporting in the context of implementing consolidated risk management for Banks exercising control over subsidiaries are regulated in Financial Services Authority Circular Letters.
Article 17
Upon the commencement of this Financial Services Authority Regulation, Bank Indonesia Regulation Number 8/6/PBI/2006 concerning the Implementation of Consolidated Risk Management for Banks Exercising Control over Subsidiaries (State Gazette of the Republic of Indonesia Year 2006 Number 8, Supplement to the State Gazette of the Republic of Indonesia Number 4602) is repealed and declared invalid.
Article 18
This Financial Services Authority Regulation takes effect on the date of its promulgation.

This copy is in accordance with the original
Director of Law 1
Law Department signed
Yuliana

In order that everyone may know it, it is ordered to promulgate this Financial Services Authority Regulation by placing it in the State Gazette of the Republic of Indonesia.
Established in Jakarta on July 12, 2017
CHAIRMAN OF THE COMMISSIONERS COUNCIL
FINANCIAL SERVICES AUTHORITY, signed
MULIAMAN D. HADAD

Promulgated in Jakarta on July 12, 2017
MINISTER OF LAW AND HUMAN RIGHTS
REPUBLIC OF INDONESIA, signed
YASONNA H. LAOLY
STATE GAZETTE OF THE REPUBLIC OF INDONESIA YEAR 2017 NUMBER 144

EXPLANATION
OF
FINANCIAL SERVICES AUTHORITY REGULATION
NUMBER 38 /POJK.03/2017
CONCERNING
THE IMPLEMENTATION OF CONSOLIDATED RISK MANAGEMENT FOR BANKS THAT EXERCISE CONTROL OVER SUBSIDIARIES

I. GENERAL
Banks are always faced with risks inherent in every business activity. These inherent risks can originate from the Bank's own business activities or from companies related to the Bank.
Meanwhile, the development of financial transactions in the era of globalization causes increasing integration of financial products and services conducted by Banks. Increasingly integrated financial products and services cause the risk exposures that Banks must face to become more complex and increased. Facing these conditions, Banks need to consider all risks that can affect the continuity of the Bank's business. Risks that must be considered include all risks that can directly or indirectly affect the continuity of the Bank's business, whether originating from Subsidiaries or from the business group. As an initial step to measure risks more comprehensively, Banks are requested to implement consolidated risk management on controlled Subsidiaries. The implementation of risk management on Subsidiaries is also intended to increase the competitiveness of the Indonesian banking industry in the international world, considering that this is one of the fulfillments of Bank compliance with international standards.

II. ARTICLE BY ARTICLE
Article 1
Clear enough.
Article 2
Paragraph (1)
The implementation of consolidated risk management is conducted with reference to Financial Services Authority regulations concerning the implementation of risk management for general banks and Financial Services Authority regulations concerning the implementation of risk management for general Islamic banks and Islamic business units, which include:
a. active supervision by the board of directors and board of commissioners; b. adequacy of risk management policies and procedures as well as the establishment of risk limits;
c. adequacy of the risk identification, measurement, monitoring, and control processes, as well as risk management information systems; and
d. comprehensive internal control systems.
Active supervision by the board of directors and board of commissioners as referred to in letter a, for general Islamic banks includes active supervision by the Sharia Supervisory Board.
Paragraph (2)
Clear enough.
Article 3
Business activities in the financial sector include, among others, banking services, leasing, venture capital, securities companies, insurance, financing companies, and clearing, settlement, and custody institutions. Letter a Clear enough. Letter b Clear enough. Letter c number 1 Clear enough. number 2 The term "Joint Control" refers to joint control by owners over the Subsidiary based on contractual agreements. Joint control must be proven by a written agreement or commitment from the owners to provide support, both financial and non-financial, according to their respective ownership. Letter d Clear enough.
Article 4
Paragraph (1)
Clear enough.
Paragraph (2)
Letter a
Accounting information systems include, among others, systems capable of generating financial reports, calculating KPMM, assessing asset quality and forming asset impairment allowances, calculating BMPK which calculates all Bank exposures and Subsidiary exposures on a consolidated basis, and assessing health status on a consolidated basis. The preparation of consolidated financial statements refers to financial accounting standards. Letter b Risk management information systems refer to Financial Services Authority regulations concerning the implementation of risk management for general banks and Financial Services Authority regulations concerning the implementation of risk management for general Islamic banks and Islamic business units.

Article 5
The provisions in this paragraph are intended so that consolidated financial statements and KPMM calculations can be conducted more accurately, in accordance with expected risks.
Article 6
Paragraph (1)
The BMPK percentage for Banks individually, as regulated in statutory regulations concerning the maximum credit limit for general banks, is also applied on a consolidated basis.
Paragraph (2)
Clear enough.
Article 7
Clear enough.
Article 8
Paragraph (1)
Good integrity is evidenced, among others, by the managers of the Subsidiary not coming from parties listed in the Financial Services Authority's Fail List and/or the Non-Performing Loan List. The term "managers managing the Subsidiary" refers to the board of directors and board of commissioners for limited liability companies or other equivalent positions in other legal entities. Paragraph (2) Clear enough. Paragraph (3) Clear enough. Paragraph (4) Clear enough.

Article 9
Paragraph (1)
Consolidated health status assessment refers to Financial Services Authority regulations concerning the health status assessment of general banks and Financial Services Authority regulations concerning the health status assessment of general Islamic banks and Islamic business units. Paragraph (2) Clear enough.
Article 10
Paragraph (1)
The preparation of consolidated risk profile reports refers to Financial Services Authority regulations concerning the implementation of risk management for general banks and Financial Services Authority regulations concerning the implementation of risk management for general Islamic banks and Islamic business units. Paragraph (2) Clear enough.
Article 11
Criteria used in Financial Services Authority Regulations concerning the determination of status and supervisory follow-up for general banks include, among others, the KPMM ratio and the non-performing loan ratio or non-performing financing ratio calculated on a consolidated basis.
Article 12
Clear enough.
Article 13
Paragraph (1)
Insurance has risk characteristics that are very different from Banks, so consolidated risk management assessment is not applied, especially for quantitative matters.
Letter a
The assessment of risk management implementation for insurance companies refers to Financial Services Authority regulations concerning the implementation of risk management for non-bank financial service institutions. Letter b Clear enough. Paragraph (2) Clear enough. Paragraph (3) Clear enough.
Article 14
Paragraph (1)
The Bank's participation portfolio limits refer to Financial Services Authority Regulations concerning prudential principles in capital participation activities.
Paragraph (2)
Clear enough.
Article 15
Clear enough.
Article 16
Clear enough.
Article 17
Clear enough.
Article 18
Clear enough.
SUPPLEMENT TO THE STATE GAZETTE OF THE REPUBLIC OF INDONESIA NUMBER 6087