Implementation of Risk Management for Conventional Commercial Banks

4. Bank ...

To:
The Board of Directors of Conventional Commercial Banks

COPY

CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY NUMBER 34 /SEOJK.03/2016

CONCERNING
THE IMPLEMENTATION OF RISK MANAGEMENT FOR COMMERCIAL BANKS

In view of the implementation of the Financial Services Authority Regulation Number 18/POJK.03/2016 concerning the Implementation of Risk Management for Commercial Banks (State Gazette of the Republic of Indonesia Year 2016 Number 53, Additional State Gazette of the Republic of Indonesia Number 5861), the Financial Services Authority Regulation Number 4/POJK.03/2016 concerning the Assessment of the Health Level of Commercial Banks (State Gazette of the Republic of Indonesia Year 2016 Number 16, Additional State Gazette of the Republic of Indonesia Number 5840), and regulations governing the implementation of consolidated risk management for Banks that exercise control over subsidiaries, it is necessary to regulate implementation provisions regarding the Implementation of Risk Management for Commercial Banks in this Financial Services Authority Circular Letter as follows:

I. GENERAL PROVISIONS

1. The Standard Guidelines for the Implementation of Risk Management for Commercial Banks serve as the standard reference for the implementation of Risk Management for Banks.

2. Banks that already have policies, procedures, and/or guidelines for the implementation of Risk Management but have not yet met the standards for the implementation of Risk Management must adjust and perfect them by referring to Appendix I of this Financial Services Authority Circular Letter.

3. The perfection of the Risk Management implementation guidelines as referred to in item 2 must be carried out no later than 30 (thirty) days from the establishment of this Financial Services Authority Circular Letter.

4. Banks may expand and deepen the Standard Guidelines for the Implementation of Risk Management according to the Bank's needs.

II. STANDARDS FOR THE IMPLEMENTATION OF RISK MANAGEMENT

1. The Standard Guidelines for the Implementation of Risk Management for Commercial Banks must, at a minimum, contain:

a. General Implementation of Risk Management, which covers active supervision by the Board of Directors and Board of Commissioners, adequacy of Risk Management policies and procedures, and the establishment of Risk limits, adequacy of the Risk identification, measurement, monitoring, and control processes, as well as a comprehensive Risk Management information system and internal control system.

b. Implementation of Risk Management for Each Risk, which covers the implementation of Risk Management for each Risk comprising 8 (eight) Risks, namely Credit Risk, Market Risk, Liquidity Risk, Operational Risk, Legal Risk, Reputational Risk, Strategic Risk, and Compliance Risk.

c. Risk Profile Assessment, which covers the assessment of inherent Risk and the assessment of the quality of Risk Management implementation reflecting the Risk control system, both for the Bank individually and for the Bank on a consolidated basis. The assessment is conducted against 8 (eight) Risks, namely Credit Risk, Market Risk, Liquidity Risk, Operational Risk, Legal Risk, Reputational Risk, Strategic Risk, and Compliance Risk. In conducting the Risk profile assessment, the Bank refers to regulations governing the assessment of the health level of Commercial Banks.

2. In order to implement Risk Management, the Bank forms a Risk Management Committee and a Risk Management Unit, in accordance with the size and complexity of the Bank's business. The Risk Management Organizational Structure in the Bank may refer to Appendix II of this Financial Services Authority Circular Letter.

3. In the process of implementing Risk Management, the Bank may use various Risk measurement approaches, both with standard methods as recommended by the Basel Committee on Banking Supervision at the Bank for International Settlements, as well as with advanced (internal model) measurement methods. The use of internal models is intended to anticipate the increasingly complex development of banking operations as well as anticipate future banking policies. The implementation of internal models requires various minimum quantitative and qualitative requirements so that the risk assessment results can better reflect the Bank's actual conditions. For the purpose of calculating Market Risk related to the calculation of Minimum Capital Requirement (KPMM), the Bank refers to the applicable regulations.

4. In order to implement effective Risk Management, the Bank takes preparatory, developmental, and/or perfecting steps as necessary, including:

a. conducting diagnosis and analysis regarding the organization, policies, procedures, and guidelines, as well as the development of systems related to the implementation of Risk Management;

b. preparing a perfection plan in accordance with the reference in the Standard Guidelines for the Implementation of Risk Management for Commercial Banks in the event that there are still inconsistencies between the Bank's internal guidelines and the Standard Guidelines for the Implementation of Risk Management for Commercial Banks;

c. socializing the Risk Management implementation guidelines to employees so that they understand Risk Management practices, and developing a risk culture among all employees at every level of the Bank's organization; and

d. ensuring that the Internal Audit Unit (SKAI) participates in monitoring the process of perfecting Risk Management guidelines and the preparation of quarterly risk profile reports.

III. REPORTING

In order to implement Risk Management, the Bank submits reports as follows:

A. Risk Profile Report

1. The Bank submits risk profile reports, both individually and on a consolidated basis, to the Financial Services Authority on a quarterly basis for the positions of March, June, September, and December, presented comparatively with the previous quarter's position.

2. The format and content of the risk profile report refer to Appendix III and Appendix IV of this Financial Services Authority Circular Letter.

3. The risk profile report submitted by the Bank to the Financial Services Authority contains the same substance as the risk profile report submitted by the Risk Management Unit to the President Director and the Risk Management Committee.

4. The mechanism for assessing the risk profile, establishing the risk level, establishing the risk profile rating, and submitting the risk profile to the Financial Services Authority refers to regulations governing the assessment of the health level of Commercial Banks.

B. Report on New Products and Activities

Scope, format, and submission method refer to Financial Services Authority regulations regarding commercial bank business activities based on core capital.

C. Other Reports

1. Report in the Event of Conditions That Have the Potential to Cause Significant Losses to the Bank's Financial Condition

The report is incidental and submitted to the Financial Services Authority based on the Bank's current conditions, which have specific exposures and the Financial Services Authority's assessment of the Bank. The report is submitted in the event of conditions including:

a. the Bank has been designated by the Financial Services Authority in the status of a Bank under intensive supervision or a Bank under special supervision;

b. the Bank has very significant Market Risk and Liquidity Risk exposures; and/or

c. external conditions, namely the market experiences very sharp fluctuations and tends to be uncontrollable by the Bank.

2. Other Reports Related to the Implementation of Risk Management

a. The Bank submits other reports related to the implementation of Risk Management, including the Risk Management Report for Liquidity Risk for liquidity monitoring to the Financial Services Authority, consisting of:

1. Cash Flow Projection Report, both in Rupiah and foreign currency, for the management of daily liquidity position and Liquidity Risk as in Appendix I of the Standard Guidelines for the Implementation of Risk Management item II.C.3.c.4).c).ii of this Financial Services Authority Circular Letter; and

2. Maturity Profile Report, both in Rupiah and foreign currency, for measuring Liquidity Risk as in Appendix I of the Standard Guidelines for the Implementation of Risk Management item II.C.3.c.2).d).ii of this Financial Services Authority Circular Letter.

b. The Cash Flow Projection Report as referred to in item a.1) includes cash flow projection data for the next 1 (one) week mapped daily. The report is submitted weekly, namely every Friday, according to the Bank's internal format. In the event that Friday falls on a holiday, the report is submitted on the preceding working day.

Example:
The Bank submits the Cash Flow Projection Report on Friday, June 10, 2016, which covers the cash flow projection from Monday, June 13, 2016, to Friday, June 17, 2016.

c. The format of the Cash Flow Projection Report as referred to in letter b) must include, at a minimum, financial position report accounts (balance sheet) and administrative account accounts with significant transactions in accordance with the Bank's characteristics, business activities, and complexity, and must be done consistently. The Financial Services Authority may request the Bank to adjust the format of the Cash Flow Projection Report submitted to the Financial Services Authority.

In the event that the Bank changes the format of the Cash Flow Projection Report submitted to the Financial Services Authority, the Bank must inform the Financial Services Authority of the reasons for the change.

d. The Maturity Profile Report as referred to in item a.2) is submitted to the Financial Services Authority monthly with scope and format in accordance with Appendix V of this Financial Services Authority Circular Letter. The method of submitting the Maturity Profile Report is carried out in accordance with regulations governing periodic reports of commercial banks.

e. The Cash Flow Projection Report and the Maturity Profile Report are submitted to the Financial Services Authority online through the Financial Services Authority reporting system. In the event that submission of reports through the Financial Services Authority reporting system cannot yet be done, the Bank submits reports online as follows:

1. Cash Flow Projection Report through the Head Office Report of Commercial Banks (LKPBU); and

2. Maturity Profile Report through the Periodic Report of Commercial Banks (LBBU).

f. Under certain conditions, the Financial Services Authority may request the Bank to submit reports related to the implementation of Risk Management for Liquidity Risk outside the established time and/or other reports besides those submitted periodically.

Examples of other reports besides those submitted periodically are cash flow projection reports for risk measurement as in Appendix I of the Standard Guidelines for the Implementation of Risk Management item II.C.3.c.2)d).iii and stress testing reports as in Appendix I of the Standard Guidelines for the Implementation of Risk Management item II.C.3.c.2)d).iv of this Financial Services Authority Circular Letter.

3. Other Reports Related to the Issuance of Products and/or Implementation of Certain Activities

Other reports related to the issuance of products and/or implementation of certain activities include reports on the implementation of activities related to mutual funds and reports on the implementation of marketing cooperation with insurance companies (bancassurance). Scope, format, and submission method refer to applicable regulations.

IV. OTHER PROVISIONS

1. The Bank implements Risk Management in accordance with its objectives, business policies, size and complexity of business, and the Bank's capabilities.

2. The aforementioned Appendices are an integral part of this Financial Services Authority Circular Letter.

V. CLOSING

At the time this Financial Services Authority Circular Letter takes effect, then:

1. Bank Indonesia Circular Letter Number 5/21/DPNP dated September 29, 2003 concerning the Implementation of Risk Management for Commercial Banks, is declared not applicable to Conventional Commercial Banks.

2. Bank Indonesia Circular Letter Number 13/23/DPNP dated October 25, 2011 concerning Amendments to Circular Letter Number 5/21/DPNP concerning the Implementation of Risk Management for Commercial Banks, is revoked and declared not applicable.

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

Established in Jakarta on September 1, 2016

EXECUTIVE HEAD OF BANKING SUPERVISOR
FINANCIAL SERVICES AUTHORITY, signed

NELSON TAMPUBOLON

Copy in accordance with the original
Director of Law 1
Legal Department signed

Yuliana