POJK on Amendment to Financial Services Authority Regulation Number 11/POJK.03/2016 on Minimum Capital Provision Requirements for Commercial Banks

COPY
FINANCIAL SERVICES AUTHORITY REGULATION
NUMBER 34 /POJK.03/2016
CONCERNING
AMENDMENT TO THE FINANCIAL SERVICES AUTHORITY REGULATION NUMBER 11/POJK.03/2016 CONCERNING MINIMUM CAPITAL PROVISION REQUIREMENTS FOR COMMERCIAL BANKS WITH THE GRACE OF GOD THE ALMIGHTY THE COMMISSIONERS OF THE FINANCIAL SERVICES AUTHORITY, Considering:
a. that in order to create a healthy banking system capable of developing and competing nationally and internationally, in line with international standard developments, it is necessary to refine the provisions regarding minimum capital provision requirements for commercial banks; b. that based on the considerations referred to in letter a, it is necessary to establish a Financial Services Authority Regulation concerning Amendment to the Financial Services Authority Regulation Number 11/POJK.03/2016 concerning Minimum Capital Provision Requirements for Commercial Banks; FINANCIAL SERVICES AUTHORITY REPUBLIC OF INDONESIA

Recalling:

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 (State Gazette of the Republic of Indonesia Year 1998 Number 182, Supplement to the State Gazette of the Republic of Indonesia Number 3790);
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);
Law Number 9 of 2016 concerning 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);
Financial Services Authority Regulation Number 11/POJK.03/2016 concerning Minimum Capital Provision Requirements for Commercial Banks (State Gazette of the Republic of Indonesia Year 2016 Number 25, Supplement to the State Gazette of the Republic of Indonesia Number 5848);

DECIDING:
Establishing: FINANCIAL SERVICES AUTHORITY REGULATION CONCERNING AMENDMENT TO THE FINANCIAL SERVICES AUTHORITY REGULATION NUMBER 11/POJK.03/2016 CONCERNING MINIMUM CAPITAL PROVISION REQUIREMENTS FOR COMMERCIAL BANKS.

Article I
Several provisions in the Financial Services Authority Regulation Number 11/POJK.03/2016 concerning Minimum Capital Provision Requirements for Commercial Banks (State Gazette of the Republic of Indonesia Year 2016 Number 25, Supplement to the State Gazette of the Republic of Indonesia Number 5848) are amended as follows:

The provisions of Article 1 are amended to read as follows:
Article 1
In this Financial Services Authority Regulation, the following terms are defined:
Bank means a commercial bank as referred to in Law Number 7 of 1992 concerning Banking as amended by Law Number 10 of 1998, including branch offices of banks located abroad, that conduct conventional business activities.
Systemic Bank means a bank as referred to in Law Number 9 of 2016 concerning Prevention and Handling of Financial System Crises.
Board of Directors:
a. for Banks in the form of a Limited Liability Company, means the board of directors as referred to in Law Number 40 of 2007 concerning Limited Liability Companies; b. for Banks in the form of legal entities:

Regional Public Enterprises or Regional State-Owned Enterprises means the board of directors as referred to in Law Number 23 of 2014 concerning Regional Government as last amended by Law Number 9 of 2015;
Regional Enterprises means the board of directors at Banks that have not yet changed their form into Regional Public Enterprises or Regional State-Owned Enterprises as referred to in Law Number 23 of 2014 concerning Regional Government as last amended by Law Number 9 of 2015;
c. for Banks in the form of a Cooperative legal entity, means the management board as referred to in Law Number 25 of 1992 concerning Cooperatives;
d. for Banks with the status of branch offices of banks located abroad, means the branch office head and officials one level below the branch office head.

Board of Commissioners:
a. for Banks in the form of a Limited Liability Company, means the board of commissioners as referred to in Law Number 40 of 2007 concerning Limited Liability Companies; b. for Banks in the form of legal entities:

Regional Public Enterprises means the supervisory board as referred to in Law Number 23 of 2014 concerning Regional Government as last amended by Law Number 9 of 2015;
Regional State-Owned Enterprises means commissioners as referred to in Law Number 23 of 2014 concerning Regional Government as last amended by Law Number 9 of 2015;
Regional Enterprises means supervisors at Banks that have not yet changed their form into Regional Public Enterprises or Regional State-Owned Enterprises as referred to in Law Number 23 of 2014 concerning Regional Government as last amended by Law Number 9 of 2015;
c. for Banks in the form of a Cooperative legal entity, means supervisors as referred to in Law Number 25 of 1992 concerning Cooperatives;
d. for Banks with the status of branch offices of banks located abroad, means parties appointed to carry out supervisory functions.

Subsidiary Company is a legal entity or company owned and/or controlled by the Bank directly or indirectly, both domestically and abroad, that conducts financial business activities, consisting of:
a. subsidiary company means a Subsidiary Company with Bank ownership of more than 50% (fifty percent); b. participation company means a Subsidiary Company with Bank ownership of 50% (fifty percent) or less, but the Bank has control over the company;
c. companies with Bank ownership of more than 20% (twenty percent) up to 50% (fifty percent) that meet the requirements:

Bank ownership and other parties' ownership in the Subsidiary Company are equal; and
each owner exercises joint control over the Subsidiary Company;
d. other entities that must be consolidated based on financial accounting standards, but excluding insurance companies and companies owned for the purpose of credit restructuring.

Control means control as referred to in the Financial Services Authority Regulation concerning the Implementation of Integrated Risk Management for Financial Conglomerates.
Capital Equivalency Maintained Assets (hereinafter abbreviated as CEMA) is the allocation of branch office business funds from banks located abroad that must be placed in financial assets in specific amounts and requirements.
Internal Capital Adequacy Assessment Process (hereinafter abbreviated as ICAAP) is the process conducted by the Bank to determine capital adequacy according to the Bank's risk profile and to determine strategies to maintain capital levels.
Supervisory Review and Evaluation Process (hereinafter abbreviated as SREP) is the review process conducted by the Financial Services Authority over the results of the Bank's ICAAP.
Capital Conservation Buffer is additional capital that functions as a buffer in the event of losses during a crisis period.
Countercyclical Buffer is additional capital that functions as a buffer to anticipate losses if there is excessive banking credit growth that has the potential to disrupt financial system stability.
Capital Surcharge for Systemic Banks is additional capital that functions to reduce negative impacts on financial system stability and the economy in the event of a Systemic Bank's failure by increasing the Bank's ability to absorb losses.
Credit Risk is the risk arising from the failure of debtors and/or other parties to fulfill obligations to the Bank.
Market Risk is the risk to balance sheet positions and administrative accounts, including derivative transactions, resulting from overall changes in market conditions, including option price change risks.
Operational Risk is the risk arising from insufficient and/or non-functional internal processes, human error, system failures, and/or external events affecting Bank operations.
Trading Book is all financial instrument positions in the balance sheet and administrative accounts, including derivative transactions, held by the Bank with the purpose of:
a. trading and freely transferable or fully hedgable, whether from proprietary positions, customer requests, or brokering activities, and in the context of market making, which includes:

positions held for resale in the short term;
positions held for the purpose of obtaining actual and/or potential short-term profits from price movements; or
positions held for the purpose of locking in arbitrage profits; and
b. hedging other positions in the Trading Book.

Banking Book is all other positions not included in the Trading Book.
The provisions of Article 3 are amended to read as follows:
Article 3
(1) In addition to the minimum capital provision requirement according to the risk profile as referred to in Article 2, Banks are required to establish additional capital as a buffer according to the criteria regulated in this Financial Services Authority Regulation. (2) The additional capital as referred to in paragraph (1) may consist of:
a. Capital Conservation Buffer; b. Countercyclical Buffer; and/or
c. Capital Surcharge for Systemic Banks.
(3) The amount of additional capital as referred to in paragraph (2) is regulated:
a. Capital Conservation Buffer is set at 2.5% (two point five percent) of Risk-Weighted Assets (RWA); b. Countercyclical Buffer is set in the range of 0% (zero percent) to 2.5% (two point five percent) of RWA;
c. Capital Surcharge for Systemic Banks is set in the range of 1% (one percent) to 2.5% (two point five percent) of RWA.
(4) The percentage of the Countercyclical Buffer as referred to in paragraph (3) letter b is based on the determination by the competent authority. (5) The Financial Services Authority determines the percentage of the Capital Surcharge for Systemic Banks as referred to in paragraph (3) letter c. (6) In determining the amount of Capital Surcharge for Systemic Banks as referred to in paragraph (5), the Financial Services Authority coordinates with the competent authority. (7) The Financial Services Authority may determine a percentage of Capital Surcharge for Systemic Banks that is larger than the range as referred to in paragraph (3) letter c. (8) The fulfillment of additional capital as referred to in paragraph (3) is met with Core Tier 1 capital components. (9) The fulfillment of additional capital as referred to in paragraph (8) is calculated after Core Tier 1 capital components are allocated to fulfill the minimum provision requirements for:
a. minimum Core Tier 1 capital as referred to in Article 11 paragraph (3); b. minimum Tier 1 capital as referred to in Article 11 paragraph (2); and
c. minimum capital according to risk profile as referred to in Article 2 paragraph (3).
The provisions of Article 4 are amended to read as follows:
Article 4
(1) Banks classified as Commercial Banks with Business Activities (BUKU) 3 and BUKU 4 are required to establish a Capital Conservation Buffer as referred to in Article 3 paragraph (3) letter a. (2) All Banks are required to establish a Countercyclical Buffer as referred to in Article 3 paragraph (3) letter b. (3) Banks designated as Systemic Banks are required to establish a Capital Surcharge for Systemic Banks as referred to in Article 3 paragraph (3) letter c.
The provisions of Article 5 are amended to read as follows:
Article 5
(1) The Financial Services Authority designates Systemic Banks as referred to in Article 4 paragraph (3).
(2) The Financial Services Authority coordinates with the competent authority in designating Systemic Banks as referred to in paragraph (1).
The provisions of Article 6 are amended to read as follows:
Article 6
(1) Banks are required to establish additional capital in the form of a Capital Conservation Buffer as referred to in Article 3 paragraph (3) letter a in a phased manner starting from January 1, 2016. (2) Banks are required to fulfill the establishment of the Capital Conservation Buffer as referred to in paragraph (1) in a phased manner:
a. by 0.625% (zero point six two five percent) of RWA starting from January 1, 2016; b. by 1.25% (one point two five percent) of RWA starting from January 1, 2017;
c. by 1.875% (one point eight seven five percent) of RWA starting from January 1, 2018; and
d. by 2.5% (two point five percent) of RWA starting from January 1, 2019.
(3) Banks are required to establish additional capital in the form of a Countercyclical Buffer as referred to in Article 3 paragraph (3) letter b starting from January 1, 2016. (4) Banks are required to establish a Capital Surcharge for Systemic Banks as referred to in Article 3 paragraph (3) letter c starting from January 1, 2016. (5) The calculation method and procedures for establishing the Capital Surcharge for Systemic Banks are regulated in Financial Services Authority provisions. (6) The Financial Services Authority coordinates with the competent authority in determining the calculation method and procedures for establishing the Capital Surcharge for Systemic Banks as referred to in paragraph (5).
The provisions of Article 10 are amended to read as follows:
Article 10
(1) Capital for branch offices of banks located abroad consists of:
a. business funds; b. retained earnings and prior year profits after deducting the influence of factors as referred to in Article 14 paragraph (2);
c. current year profits after deducting the influence of factors as referred to in Article 14 paragraph (2);
d. general reserves; e. surplus balance from fixed asset revaluation; f. other comprehensive income in the form of potential gains from the increase in fair value of financial assets classified as available for sale; g. general reserves of the Provision for Asset Impairment (PPA) on productive assets with calculations as referred to in Article 20 paragraph (1) letter c; and h. others based on approval from the Financial Services Authority. (2) Capital for branch offices of banks located abroad as referred to in paragraph (1) must take into account factors that reduce capital as regulated in Article 14 paragraph (1) letter b, Article 17, and Article 22. (3) The calculation of business funds as a capital component as referred to in paragraph (1) letter a is conducted in the event:
a. the actual business funds position is larger than the declared business funds, in which case the declared business funds are taken into account; b. the actual business funds position is smaller than the declared business funds, in which case the actual business funds are taken into account; or
c. the actual business funds position is negative, becoming a factor reducing the capital component as referred to in paragraph (1).
The provisions of Article 12 are amended to read as follows:
Article 12
Paid-up capital instruments as referred to in Article 11 paragraph (1) letter a number 1 must meet the following requirements:
a. issued and fully paid; b. subordinate to other capital components;
c. permanent in nature;
d. not redeemable by the Bank, except when meeting treasury stock repurchase criteria or upon liquidation; e. available to absorb losses occurring before and upon liquidation; f. return on investment is not guaranteed and cannot be accumulated across periods; g. not protected or guaranteed by the Bank or Subsidiary Company; h. no agreement exists that can increase the seniority of the instrument legally or economically;
i. has dividend or return payment characteristics:
can only be conducted if the Bank has fulfilled all legal and contractual obligations and made payments on other capital instrument returns;
derived from retained earnings and/or current year profits;
has no certain value and is not related to the value paid for the capital instrument; and
has no preference features;
j. funding source does not come from the issuing Bank directly or indirectly; and k. classified as equity based on financial accounting standards.
The provisions of Article 13 are amended to read as follows:
Article 13
Banks conducting treasury stock repurchases as referred to in Article 12 letter d, which have been recognized as paid-up capital components, must meet the following requirements:
a. after a period of 5 (five) years since issuance; b. for specific purposes;
c. conducted in accordance with applicable regulations;
d. has obtained approval from the Financial Services Authority; and e. does not cause capital to fall below minimum requirements as referred to in Article 2, Article 3, and Article 7.
The provisions of Article 14 are amended to read as follows:
Article 14
(1) Additional capital reserves (disclosed reserves) as referred to in Article 11 paragraph (1) letter a number 2 consist of:
a. adding factors, namely:
Other comprehensive income in the form of:
a) translation differences; b) potential gains from the increase in fair value of financial assets categorized as available for sale; and c) surplus balance from fixed asset revaluation;
other additional capital reserves in the form of:
a) agio arising from the issuance of instruments classified as Core Tier 1 capital; b) general reserves; c) prior year profits; d) current year profits; e) paid-up capital funds, which meet the requirements:

fully paid for the purpose of capital increase but not yet supported by completeness of requirements to be classified as paid-up capital such as holding a general meeting of shareholders or approval of the articles of association from the competent authority;
placed in a special account (escrow account) that does not yield returns;
cannot be withdrawn by shareholders or prospective shareholders and is available to absorb losses; and
use of funds must be with approval from the Financial Services Authority; and
f) others based on approval from the Financial Services Authority; b. reducing factors, namely:

Other comprehensive income in the form of:
a) translation deficits; and b) potential losses from the decrease in fair value of financial assets categorized as available for sale;
other additional capital reserves in the form of:
a) disagio arising from the issuance of instruments classified as Core Tier 1 capital; b) prior year losses; c) current year losses; d) deficit between PPA on productive assets and Provision for Impairment Losses (CKPN) on productive assets; e) deficit between the amount of adjustments to valuation results from financial instruments in the Trading Book and the amount of adjustments based on financial accounting standards; f) non-productive PPA; and g) others based on approval from the Financial Services Authority. (2) In the calculation of prior year profits and/or current year profits as referred to in paragraph (1) letter a number 2 letters c) and d), the influence of the following factors must be excluded:
a. increase or decrease in fair value of financial liabilities; and/or b. gains on sale of assets in securitization transactions.
The provisions of Article 15 are amended to read as follows:
Article 15
(1) Additional Tier 1 capital instruments as referred to in Article 11 paragraph (1) letter b must meet the following requirements:
a. issued and fully paid; b. have no maturity date and no requirements requiring repayment by the Bank in the future;
c. repurchase or principal payment of the instrument must obtain supervisory approval;
d. have no step-up feature; e. have a feature to be converted into common shares or written down in the event the Bank's going concern is potentially impaired (point of non-viability), which is clearly stated in the issuance documentation or agreement; f. subordinate at the time of liquidation, clearly stated in the issuance documentation or agreement; g. return on investment is not guaranteed in amount or timing, cannot be accumulated across periods, and the bank has full authority to cancel return payments when payment obligations arise; h. not protected or guaranteed by the Bank or Subsidiary Company;
i. no agreement exists that can increase the seniority of the instrument legally or economically;
j. has no dividend or return payment features sensitive to Credit Risk; k. in the event accompanied by a call option feature, must meet the requirements:
can only be executed no earlier than 5 (five) years after the capital instrument is issued;
issuance documentation must state that the option can only be executed with approval from the Financial Services Authority; and
the Bank does not provide expectations of repurchasing, or conducting other activities that could provide such expectations;
l. cannot be purchased by the issuing Bank and/or Subsidiary Company;
m. funding source does not come from the issuing Bank directly or indirectly; n. has no features that hinder the process of adding capital in the future; o. in certain conditions where additional capital is needed through the issuance of instruments by entities outside the consolidation scope, the proceeds from the issuance must be immediately handed over to the Bank; and p. has obtained approval from the Financial Services Authority to be counted as a capital component. (2) Banks may only execute the call option as referred to in paragraph (1) letter k provided that:
a. approval from the Financial Services Authority has been obtained; b. the Bank's profitability conditions are good;
c. after executing the call option, the Bank's capital remains above the minimum requirements as referred to in Article 2, Article 3, and Article 7; and
d. replaced with capital instruments of equal or better quality.
The provisions of Article 17 are amended to read as follows:
Article 17
(1) Core Tier 1 capital as referred to in Article 9 paragraph (1) letter a number 1 is calculated with reducing factors in the form of:
a. deferred tax; b. goodwill;
c. all other intangible assets;

d. all Bank participations including:

Bank’s participation in Subsidiary Companies, except for temporary capital participation by the Bank in a Subsidiary Company in the context of credit restructuring;
participation in companies or legal entities where the Bank’s ownership is more than 20% (twenty percent) up to 50% (fifty percent) but the Bank does not have Control; and
participation in insurance companies;
e. capital shortfall (shortfall) from the fulfillment of the minimum solvency ratio (Risk Based Capital or minimum RBC) in insurance companies owned and controlled by the Bank; f. securitization exposure; and g. other main core capital reduction factors as referred to in Article 22. (2) The capital reduction factors referred to in paragraph (1) letters a, b, c, d, e, and g are not calculated in the Risk-Weighted Assets (ATMR) for Credit Risk.
The provisions of Article 19 are amended to read as follows:
Article 19
(1) Supplementary capital instruments as referred to in Article 9 paragraph (1) letter b must meet the following requirements:
a. issued and fully paid; b. have a maturity of 5 (five) years or more and can only be redeemed with the approval of the Financial Services Authority;
c. have a feature to be converted into common shares or undergo a write-down in the event the Bank is potentially unable to continue its business operations (point of non-viability), which is clearly stated in the issuance documentation or agreement;
d. are subordinate, as stated in the issuance documentation or agreement; e. principal and/or yield payments are deferred and accumulated across periods (cumulative) if payment would cause the Minimum Capital Adequacy Ratio (KPMM) individually or on a consolidated basis to fail to meet the provisions as referred to in Article 2, Article 3, and Article 7; f. are not protected or guaranteed by the Bank or Subsidiary Companies; g. do not have dividend or yield payment features sensitive to Credit Risk; h. do not have a step-up feature;
i. if accompanied by a call option feature, must meet the following requirements:
can only be executed no earlier than 5 (five) years after the capital instrument is issued;
the issuance documentation must state that the option can only be executed with the approval of the Financial Services Authority; and
the Bank does not provide expectations of buying back or engaging in other activities that could provide expectations of buying back;
j. do not have requirements for accelerated payment of interest or principal stated in the issuance documentation or agreement; k. cannot be purchased by the issuing Bank and/or Subsidiary Companies;
l. funding sources do not originate from the issuing Bank directly or indirectly;
m. in certain conditions where additional capital is needed through issuance of instruments by entities outside the consolidation scope, the proceeds from the issuance must be immediately handed over to the Bank; and n. have obtained approval from the Financial Services Authority to be counted as a capital component. (2) The Bank may only execute the call option as referred to in paragraph (1) letter i provided that:
a. approval from the Financial Services Authority has been obtained; b. the Bank’s profitability condition is in good standing; and
c. after the execution of the call option, the Bank’s capital remains above the minimum requirements as referred to in Article 2, Article 3, and Article 7 or is replaced with capital instruments that have:
equal or better quality; and
the same amount or a different amount as long as it does not exceed the supplementary capital limits as referred to in Article 18.
(3) The amount that can be counted as supplementary capital is the supplementary capital amount minus amortization calculated using the straight-line method. (4) Amortization as referred to in paragraph (3) is carried out for the remaining maturity of the instrument for the last 5 (five) years. (5) In the event there is a call option, the period until the Bank can execute the call option constitutes the remaining maturity of the instrument.
The provisions of Article 20 are amended to read as follows:
Article 20
(1) Supplementary capital includes:
a. capital instruments in the form of shares or other forms that meet the requirements as referred to in Article 19; b. agio or disagio arising from the issuance of capital instruments classified as supplementary capital; and
c. general reserves of PPA (Provision for Asset Impairment) on productive assets that must be calculated at a minimum amount of 1.25% (one point two five percent) of the Risk-Weighted Assets (ATMR) for Credit Risk.
(2) The excess amount of general reserves that must be calculated from the limit as referred to in paragraph (1) letter c can be counted as a reduction factor in the calculation of Risk-Weighted Assets (ATMR) for Credit Risk.
The provisions of Article 22 are amended to read as follows:
Article 22
(1) Factors that reduce capital as referred to in Article 9 paragraph (2) and Article 10 paragraph (2) include:
a. repurchase of capital instruments that have been recognized as a Bank’s capital component; b. placement of funds in debt instruments of other Banks recognized as a capital component by the other Bank (issuing Bank); and
c. cross-holdings obtained through legal transfer, gift, or testamentary gift as referred to in the Law regarding Limited Liability Companies, as long as they have not been transferred to third parties.
(2) All capital reduction factors as referred to in paragraph (1) letters b and c are no longer calculated in the Risk-Weighted Assets (ATMR) for Credit Risk.
The provisions in Article 41 remain unchanged, with the explanation of Article 41 paragraph (1) changed to be as established in the article-by-article explanation of this Financial Services Authority Regulation.

Article II
This Financial Services Authority Regulation shall come into force on the date of its promulgation.
To ensure that everyone knows it, it is ordered to promulgate this Financial Services Authority Regulation by placing it in the State Gazette of the Republic of Indonesia.

Determined in Jakarta on 22 September 2016
CHAIRMAN OF THE COMMISSIONERS COUNCIL
FINANCIAL SERVICES AUTHORITY, signed
MULIAMAN D. HADAD

Promulgated in Jakarta on 26 September 2016
MINISTER OF LAW AND HUMAN RIGHTS
REPUBLIC OF INDONESIA, signed
YASONNA H. LAOLY

STATE GAZETTE OF THE REPUBLIC OF INDONESIA YEAR 2016 NUMBER 188 A copy in accordance with the original Legal Director 1 Ministry of Law signed Yuliana

EXPLANATION
OF
FINANCIAL SERVICES AUTHORITY REGULATION
NUMBER 34 /POJK.03/2016
REGARDING
AMENDMENTS TO FINANCIAL SERVICES AUTHORITY REGULATION NUMBER 11/POJK.03/2016 ON MINIMUM CAPITAL REQUIREMENTS FOR COMMERCIAL BANKS

I. GENERAL
In line with the international standard “Global Regulatory Framework for More Resilient Banks and Banking System” better known as Basel III, Banks are required to improve the quality and quantity of Bank capital so that Banks are better able to absorb potential losses. In relation to this, it is necessary to adjust the provisions on minimum capital requirements for Commercial Banks, including by adjusting the requirements for capital instruments and Bank capital components.

II. ARTICLE BY ARTICLE
Article I
Number 1
Article 1
Clear enough.

Number 2
Article 3
Paragraph (1)
The formation of additional capital besides minimum capital as referred to in this paragraph functions as a buffer in the event of a financial and economic crisis that can disrupt financial system stability. Paragraph (2) Clear enough. Paragraph (3) Clear enough. Paragraph (4) What is meant by “competent authority” is Bank Indonesia. Paragraph (5) Clear enough. Paragraph (6) What is meant by “competent authority” is Bank Indonesia. Paragraph (7) Clear enough. Paragraph (8) The fulfillment of additional capital as referred to in paragraph (3) for branches of banks located abroad is fulfilled from the business funds portion placed in CEMA. Paragraph (9) Clear enough.

Number 3
Article 4
Paragraph (1)
The grouping of BOOKS refers to regulations governing business activities and branch networks based on the Bank’s core capital.
Paragraph (2)
Clear enough.
Paragraph (3)
Clear enough.

Number 4
Article 5
Paragraph (1)
Clear enough.
Paragraph (2)
What is meant by “competent authority” is Bank Indonesia.

Number 5
Article 6
Paragraph (1)
Clear enough.
Paragraph (2)
Clear enough.
Paragraph (3)
Clear enough.
Paragraph (4)
Clear enough.
Paragraph (5)
Clear enough.
Paragraph (6)
What is meant by “competent authority” is Bank Indonesia.

Number 6
Article 10
Paragraph (1)
Letter a
What is meant by “business funds” is placements originating from the Bank’s head office at branches of banks located abroad, after being reduced by placements originating from branches of banks located abroad at:

head offices;
offices of the respective banks abroad; and
other offices such as related companies of banks located abroad, which have been declared as business funds (declared business funds) and must always be recorded at all times in Indonesia as long as branches of banks located abroad operate in Indonesia.
Business funds do not include components in inter-office accounts that are not net funds such as interest liabilities and other liabilities as well as interest receivables and other receivables. What is meant by placement covers placements in all financial assets according to financial accounting standards. Letter b What is meant by “retained earnings” is the net profit balance after tax deduction which the head office decides to retain at its branch in Indonesia. What is meant by “prior year profit” is all net profits of prior years after tax deduction and whose use has not yet been determined by the head office. In the event the Bank has a deficit balance in prior years, all losses become capital reduction factors. Letter c What is meant by “current year profit” is profit obtained in the current fiscal year after tax estimation deduction. In the event the Bank incurs a loss in the current fiscal year, all losses become capital reduction factors. Letter d What is meant by “general reserves” are reserves formed from profit balance allocations after tax deduction and receiving approval from the head office as general reserves. Letter e What is meant by “balance of surplus from revaluation of fixed assets” is the difference in revaluation of the Bank’s fixed assets. Recognition of fixed asset revaluation surplus refers to financial accounting standards regarding fixed assets. Letter f The definition of financial assets classified in the available-for-sale group refers to financial accounting standards regarding financial instruments. Letter g Clear enough. Letter h Clear enough. Paragraph (2) Clear enough. Paragraph (3) The determination of the amount of business funds declared refers to regulations regarding foreign loans.

Number 7
Article 12
Letter a
Clear enough.
Letter b
Main core capital instruments are subordinate to, among others, holders of instruments meeting additional core capital criteria, supplementary capital, depositors, and creditors. Letter c Included in the definition of permanent features includes no expectation that the issuer will buy back, or other activities that could provide such expectations. Letter d Clear enough. Letter e Clear enough. Letter f Clear enough. Letter g Included in the category of being protected or guaranteed by the Bank or Subsidiary Companies is protection or guarantees received from third parties but conducted through the Bank or Subsidiary Company, for example premiums or fees for guarantees paid by the Bank or Subsidiary Company. Letter h Clear enough. Letter i Number 1 Included in legal and contractual obligations are legal and contractual obligations that fall due at the time dividend or yield payments will be made. What is meant by “legal obligations” are obligations arising from certain legal acts and/or events. What is meant by “other capital instruments” are additional core capital instruments and supplementary capital instruments. Number 2 Clear enough. Number 3 Clear enough. Number 4 Clear enough. Letter j Clear enough. Letter k Clear enough.

Number 8
Article 13
Letter a
Clear enough.
Letter b
Specific purposes for buying back shares that have been recognized as paid-up capital components are as share inventory in the context of employee stock option programs or management stock option programs or to prevent take-over attempts. Letter c What is meant by applicable legislation includes Law Number 40 of 2007 regarding Limited Liability Companies and other legislation in the capital market sector. Letter d Clear enough. Letter e Clear enough.

Number 9
Article 14
Paragraph (1)
Letter a
Number 1
Letter a)
What is meant by “translation difference of financial reports” is the exchange rate difference arising from the translation of financial reports of Bank branches and/or Subsidiary Companies abroad as regulated in financial accounting standards. Letter b) The definition of financial assets categorized as the available-for-sale group refers to financial accounting standards regarding financial instruments. Letter c) What is meant by “balance of surplus from revaluation of fixed assets” is the difference in revaluation of the Bank’s fixed assets. Recognition of the balance of surplus from revaluation of fixed assets follows financial accounting standards regarding fixed assets. Number 2 Letter a) What is meant by “agio” is the excess of capital contributions received by the Bank at the time of share issuance because the market price of shares is higher than the nominal value. Letter b) What is meant by “general reserves” are reserves formed from profit balance allocations after tax deduction, and receiving approval from the General Meeting of Shareholders or Members’ Meeting as general reserves. Letter c) Prior year profits after tax consideration include:

prior year profits, namely all net profits of prior years after tax deduction and whose use has not yet been determined by the General Meeting of Shareholders or Members’ Meeting; and
retained earnings, namely the net profit balance after tax deduction which the General Meeting of Shareholders or Members’ Meeting decides not to distribute.
Letter d)
What is meant by “current year profit” is profit obtained in the current fiscal year after tax estimation deduction and dividend payments.
Letter e)
In the event based on investigation by the Financial Services Authority, prospective Bank shareholders or capital contribution funds are found not to meet the requirements as shareholders or as capital, such funds cannot be recognized as a capital component. Letter f) Clear enough. Letter b Number 1 Letter a) What is meant by “translation deficit of financial reports” is the exchange rate difference arising from the translation of financial reports of Bank branches and/or Subsidiary Companies abroad as regulated in financial accounting standards regarding translation of financial reports in foreign currencies. Letter b) The definition of financial assets categorized as the available-for-sale group refers to financial accounting standards regarding financial instruments. Number 2 Letter a) What is meant by “disagio” is the deficit of capital contributions received by the Bank at the time of share issuance because the market price of shares is lower than the nominal value. Letter b) What is meant by “prior year losses” is all losses booked by the Bank in prior years. Letter c) What is meant by “current year losses” is all losses booked by the Bank in the current fiscal year. Letter d) What is meant by “deficit between PPA on productive assets and impairment losses on financial assets on productive assets” is the deficit between total PPA (general reserves and special provisions for all productive assets) that must be formed according to regulations regarding Bank asset quality assessment with total impairment losses on financial assets (impairment) on all productive assets (individually and collectively) according to financial accounting standards. Letter e) This deficit arises because the amount of adjustments to valuation results (mark to market) of financial instruments in the Trading Book that considers various specific factors, among others because positions are less liquid than the amount of adjustments required according to financial accounting standards regarding financial instrument measurement, specifically financial instruments measured at fair value. According to Indonesian Banking Accounting Guidelines, adjustments to valuation results of financial instruments will directly reduce or increase the book value of financial instruments. Letter f) What is meant by “non-productive PPA” is reserves that must be formed for non-productive assets according to regulations governing Bank asset quality assessment. Letter g) Clear enough. Paragraph (2) Letter a This occurs when the Bank decides to measure financial liabilities at fair value through profit or loss (fair value option) according to financial accounting standards. Letter b What is meant by “gain on sale of assets in securitization transactions (gain on sale)” is profit obtained by the Bank as the originator creditor from the sale of assets in securitization transactions sourced from capitalization of expected future margins (expected future margin) or capitalization of income from
service provision (servicing income).

Number 10
Article 15
Paragraph (1)
Letter a
Clear enough.
Letter b
Clear enough.
Letter c
In order to obtain supervisory approval, the Bank cannot assume or create market expectations that supervisory approval will be granted.
Letter d
What is meant by “step-up feature” is a feature promising an increase in interest rates or yields if the call option is not executed within the specified period. Letter e The Financial Services Authority has the authority to determine conditions where the Bank is potentially unable to continue its business operations (point of non-viability) and order the Bank to convert additional core capital instruments into common shares or undergo a write-down. The impact of undergoing a write-down includes among others reduction of liability values, reduction of liability values when the call option is executed, or reduction of some or all yield payments. The issuance documentation must contain a clause stating that additional core capital instruments can be converted into common shares or undergo a write-down if there is an order from the Financial Services Authority. Letter f Additional core capital instruments are subordinate to, among others, depositors, creditors, and holders of instruments meeting supplementary capital criteria. Letter g In the event yields are not paid, it does not cause restrictions on dividend or coupon payments for other instruments, except for common stock. Letter h Included in the category of being protected or guaranteed by the Bank or Subsidiary Companies is protection or guarantees received from third parties but conducted through the Bank or Subsidiary Company, for example premiums or fees for guarantees paid by the Bank or Subsidiary Company. Letter i Clear enough. Letter j What is meant by “dividends or yields sensitive to Credit Risk” are dividend or yield rates determined based on the rating or level of Credit Risk of the issuing Bank. Letter k Number 1 Clear enough Number 2 Clear enough Number 3 Examples of providing expectations include preparing specific criteria or conditions that allow the call option (call option) to be executed, unless such criteria or conditions are as stated in this Article. Letter l Clear enough. Letter m Clear enough. Letter n Features that hinder the process of adding capital in the future, namely among others requirements obliging the Bank to provide compensation to investors if the Bank issues new capital instruments at a lower price. Letter o Clear enough. Letter p Clear enough. Paragraph (2) Letter a Clear enough. Letter b What is meant by “Bank profitability condition in good standing” is when the execution of the call option (call option) does not disrupt the Bank’s profitability continuity. Letter c Clear enough. Letter d What is meant by “equal or better quality” is capital instruments that at least meet the requirements as additional core capital components.

Number 11
Article 17
Paragraph (1)
Letter a
Deferred tax is deducted by 100% (one hundred percent) both for deferred tax calculations in prior years and in the current year.
Deferred tax is a transaction arising as a result of applying financial accounting standards regarding income tax accounting.
In the calculation of KPMM individually, deferred tax issued is the excess of deferred tax assets minus deferred tax liabilities. Deferred tax liabilities deducted from deferred tax assets do not include deferred tax liabilities related to goodwill and other intangible assets. In the event of a deficit, the calculation of deferred tax to be issued is nil. In the calculation of KPMM on a consolidated basis, deferred tax assets of one company must not offset deferred tax liabilities of other companies in the Bank’s business group. Therefore, the impact of deferred tax in the calculation of KPMM on a consolidated basis must be calculated and issued separately for each entity. With the exclusion of the impact of deferred tax from the main core capital calculation, deferred tax assets are not counted in the ATMR calculation. Letter b The definition of goodwill refers to financial accounting standards. Goodwill is counted as a reduction factor in both the calculation of the Bank’s minimum capital individually and on a consolidated basis. Goodwill deducted from main core capital includes goodwill originating from the Bank’s capital participation in entities that are consolidated and those that are not consolidated, for example insurance companies. Goodwill deducted from main core capital is equal to the book value of goodwill minus deferred tax liabilities related to goodwill. Letter c The definition of other intangible assets refers to financial accounting standards regarding intangible assets. All other intangible assets are counted as main core capital reduction factors. Examples of other intangible assets include copyrights, patents, and other intellectual property rights including software applications developed by the Bank. Other intangible assets deducted from main core capital are equal to the book value of intangible assets minus deferred tax liabilities related to intangible assets. Letter d The value of participation counted is the book value recorded in the financial position statement (balance sheet). Letter e Capital shortfall (shortfall) is counted as a reduction factor only in the calculation of the KPMM ratio on a consolidated basis. The capital shortfall (shortfall) of insurance companies from the minimum RBC is counted if the company in question cannot meet the minimum RBC until the period specified by the Financial Services Authority.

Letter f
Treatment of securitization exposures as capital deductions or calculated as Additional Tier 2 Capital (ATMR) refers to provisions regarding asset securitization. What is meant by "securitization exposure" is credit enhancement, liquidity support, and asset-backed securities.

Letter g
Clearly stated.

Paragraph (2)
Clearly stated.

Number 12
Article 19
Paragraph (1)
Letter a
Clearly stated.

Letter b
Clearly stated.

Letter c
The Financial Services Authority (OJK) has the authority to establish conditions where a Bank is potentially impaired in its business continuity (point of non-viability) and to order the Bank to convert supplementary capital instruments into ordinary shares or to perform a write-down. The impact of performing a write-down includes, among others, reduction of liability value, reduction of liability value when the call option is exercised, or reduction of part or all of the yield payments.

In the issuance documentation, there must be a clause stating that the supplementary capital instrument can be converted into ordinary shares or undergo a write-down if there is an order from the Financial Services Authority.

Letter d
Supplementary capital instruments are subordinate to, among others, depositors and creditors.

Letter e
Clearly stated.

Letter f
Included in the meaning of being protected or guaranteed by the Bank or Subsidiary Company are protections or guarantees received from third parties but conducted through the Bank or Subsidiary Company, for example, premiums or fees for guarantees paid by the Bank or Subsidiary Company.

Letter g
What is meant by "dividends or yields sensitive to Credit Risk" is the level of dividends or yields determined based on the rating or level of Credit Risk of the issuing Bank.

Letter h
What is meant by "step-up feature" is a feature that promises an increase in interest rates or yields if the call option is not exercised within the established time period.

Letter i
Number 1
Clearly stated.

Number 2
Clearly stated.

Number 3
An example of providing expectations is preparing specific criteria or conditions that allow the call option to be exercised, unless such criteria or conditions are as stated in this Article.

Letter j
Clearly stated.

Letter k
Clearly stated.

Letter l
Clearly stated.

Letter m
Clearly stated.

Letter n
Clearly stated.

Paragraph (2)
Letter a
Clearly stated.

Letter b
What is meant by "Bank's profitability condition in good standing" is when the execution of the call option does not disrupt the Bank's profitability.

Letter c
Number 1
What is meant by "same or better quality" is a capital instrument that at least meets the requirements as a supplementary capital component.

Number 2
The supplementary capital limit is considered by taking into account all available supplementary capital instruments.

Example of "different amount":
Supplementary capital executed is Rp500 million, but at the time of replacement, the Bank's core capital has changed so that the supplementary capital limit becomes at most Rp400 million. Under this condition, the Bank can replace supplementary capital of Rp400 million.

Paragraph (3)
What is meant by "straight-line method" is prorated amortization calculation.

Paragraph (4)
Amortization is calculated based on the value of the capital instrument which has taken into account the reduction from the sinking fund.

Paragraph (5)
Illustration example of amortization implementation:
a. A Bank issues subordinated bonds with a 10 (ten) year maturity and has a call option at the end of the fifth year. In this condition, the Bank starts calculating amortization from the first year. If at the end of the fifth year, the Bank does not exercise the call option, from the beginning of the sixth year, the subordinated bonds can be recalculated in the Minimum Capital Requirement (KPMM) calculation, taking into account the required limits, including the obligation to calculate amortization. b. A Bank issues subordinated bonds with a 10 (ten) year maturity and has a call option after the fifth year has passed. In this condition, the remaining maturity of the instrument at the time of issuance is 5 (five) years. Amortization is calculated by the Bank from the first year.

After the fifth year has passed until maturity, the Bank cannot recalculate the subordinated bonds as supplementary capital even if the Bank has not exercised the call option.

Number 13
Article 20
Paragraph (1)
Letter a
Examples of capital instruments in the form of shares or other forms that meet the requirements are:

preferred shares (which give holders the right to receive dividends prior to holders of other share classifications) on a cumulative basis (cumulative preference share);
debt instruments with capital characteristics, which are subordinate, cumulative, and meet all requirements to be calculated as a supplementary capital component (cumulative subordinated debt); and
debt instruments with capital-like characteristics that can automatically and unconditionally be converted into shares after obtaining approval from the Financial Services Authority (mandatory convertible bond).
Conversion conditions and values must be established at the time of issuance, in line with market conditions.

Letter b
What is meant by "agio" is the excess of capital contributions received by the Bank at the time of issuing supplementary capital instruments because the market price of the capital instrument is higher than the nominal value. What is meant by "disagio" is the shortfall of capital contributions received by the Bank at the time of issuing supplementary capital instruments because the market price of the capital instrument is lower than the nominal value.

Letter c
The formation of general provisions for Productive Assets (PPA) over productive assets that must be formed refers to regulations governing the assessment of Bank asset quality. Example:
General provisions for PPA over productive assets that must be formed amount to Rp15 million, and the Bank's ATMR for Credit Risk is Rp1 billion. General provisions for PPA over productive assets that can be calculated as a supplementary capital component are at most 1.25% of Rp1 billion, which is Rp12.5 million. In this case, there is an excess of general provisions of Rp2.5 million that cannot be calculated as a supplementary capital component.

Paragraph (2)
The excess of general provisions for PPA over productive assets according to the example in the explanation of Paragraph (1) Letter c, which is Rp2.5 million, becomes a reduction factor in the calculation of ATMR for Credit Risk.

Number 14
Article 22
Paragraph (1)
Letter a
The repurchase of core tier 1 capital, additional tier 1 capital, or supplementary capital instruments that have been recognized as Bank capital components becomes a reduction factor for each respective capital component. Example 1:
Included in the repurchase of capital instruments that must be deducted from core tier 1 capital includes, among others, the repurchase of capital instruments previously issued by the Bank, whether directly or indirectly. Example 2:
Included in the repurchase of capital instruments that must be deducted from additional tier 1 capital includes, among others, the execution of the call option.

Letter b
Placing funds in debt instruments that have been recognized as other Bank capital components becomes a reduction factor for capital for the Bank that places funds in capital components of the same and/or better quality. Example 1:
Bank A has supplementary capital components of Rp100 billion.
Bank A buys subordinated bonds issued by Bank B which are Bank B's supplementary capital components of Rp20 billion.
In this condition, Bank A's supplementary capital will be reduced by the subordinated bonds bought by Bank A from Bank B, namely:
Rp100 billion - Rp20 billion = Rp80 billion

The above Rp80 billion is subsequently recognized as supplementary capital, taking into account the permitted supplementary capital limits.
Example 2:
Bank A has supplementary capital components of Rp10 billion and core tier 1 capital of Rp100 billion.
Bank A buys subordinated bonds issued by Bank B which are Bank B's supplementary capital components of Rp20 billion.
In this condition, Bank A's supplementary capital will be reduced by the subordinated bonds bought by Bank A from Bank B, namely:
Rp10 billion - Rp20 billion = (Rp10 billion)
The above Rp10 billion will subsequently be deducted from Bank A's core tier 1 capital.
Example 3:
Bank A only has core tier 1 capital components of Rp100 billion and has no other capital components.
Bank A buys subordinated bonds issued by Bank B which are Bank B's supplementary capital components of Rp20 billion.
In this condition, Bank A's core tier 1 capital will be reduced by the subordinated bonds bought by Bank A from Bank B, namely:
Rp100 billion - Rp20 billion = Rp80 billion.

Letter c
Regulations regarding cross-holdings refer to the Law on Limited Liability Companies.
Cross-holdings become a reduction factor for capital in capital components of the same and/or better quality for the Bank that places funds.

Cross-holdings that have become a capital reduction factor are no longer calculated in the ATMR calculation for credit risk nor in other capital reduction factors.

Paragraph (2)
Clearly stated.

Number 15
Article 41
Paragraph (1)
Positions that are less liquid include portfolios that are concentrated and potentially do not have an active and adequate market.
What is meant by having an "active and adequate market" is that assets must have an active repo or outright sale market at all times, which is indicated by, among others:

historical evidence regarding market breadth and market depth, including:
a. low spread between bid and ask prices; b. high trading volume;
c. many and diverse number of market participants; and/or
reliable market infrastructure.
Certain factors include, among others, average and volatility of trading volume, average volatility of bid or ask spread ranges, and availability of market quotes.

Paragraph (2)
Adjustments will not reduce the value of financial instruments in the financial position report (balance sheet) and will not affect the income statement.

Article II
Clearly stated.

SUPPLEMENT TO THE STATE GAZETTE OF THE REPUBLIC OF INDONESIA NUMBER 5929

POJK on Amendment to Financial Services Authority Regulation Number 11/POJK.03/2016 on Minimum Capital Provision Requirements for Commercial Banks

Lineage: Superseded

Timeline