SEOJK on Risk-Weighted Asset Calculation for Operational Risk Using the Basic Indicator Approach

To:
The Board of Directors of Conventional Commercial Banks

COPY

CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY NUMBER 24 /SEOJK.03/2016

CONCERNING

RISK-WEIGHTED ASSET CALCULATION FOR OPERATIONAL RISK USING THE BASIC INDICATOR APPROACH

In connection with Financial Services Authority Regulation Number 11/POJK.03/2016 concerning Minimum Capital 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), hereinafter referred to as POJK on Minimum Capital Requirements for Commercial Banks, it is necessary to regulate implementation provisions regarding the Risk-Weighted Asset (RWA) calculation for Operational Risk using the Basic Indicator Approach (BIA) in this Financial Services Authority Circular Letter as follows:

I. GENERAL PROVISIONS

1. To encourage the creation of a healthy banking system capable of competing nationally and internationally, a bank capital structure is required to absorb risks faced in accordance with applicable international standards.

2. Referring to applicable international standards, Operational Risk is one of the risks that must be taken into account in capital adequacy calculations besides Credit Risk, Market Risk, and other material risks.

3. Operational Risk is the risk resulting from the inadequacy and/or malfunction of internal processes, human error, system failures, and/or external events that affect bank operations.

4. Operational Risk is one of the risks taken into account by Banks in calculating RWA for the calculation of Minimum Capital Requirements (MCR). Therefore, as regulated in the POJK on Minimum Capital Requirements for Commercial Banks, Banks are required to calculate RWA for Operational Risk in the MCR calculation using:
   a. Basic Indicator Approach (BIA); b. Standardized Approach; or
   c. A more complex approach (Advanced Measurement Approach).

5. For initial implementation, the RWA calculation for Operational Risk is conducted using the Basic Indicator Approach (BIA).

II. RWA CALCULATION FOR OPERATIONAL RISK USING THE BASIC INDICATOR APPROACH

1. The RWA calculation for Operational Risk in the MCR calculation using the BIA as referred to in Item I.5 is conducted using the following formula:

RWA for Operational Risk = 12.5 x Operational Risk Capital Charge

The Operational Risk Capital Charge refers to the average of the sum of positive annual gross income (January to December) over the last 3 (three) years multiplied by 15% (fifteen percent).

The calculation of the Operational Risk Capital Charge is conducted using the following formula:

K_BIA = [ Σ(GI 1…n x α)] / n

With the following explanations:
K_BIA = Operational Risk Capital Charge using BIA GI = positive annual gross income in the last 3 (three) years n = number of years with positive gross income α = 15%

Example:
(in Million Rp)
Bank A | 2015 | 2014 | 2013 | 2012 | 2011
Gross Income | 750 | 3,000 | 2,250 | 1,750 | 2,500

Based on the data above, the capital charge for calculating RWA for Operational Risk as of 2016 is as follows:

RWA for Operational Risk = 12.5 x Operational Risk Capital Charge = 12.5 x [15% x {(750+3,000+2,250)/3}] = 3,750

Thus, the RWA for Operational Risk as of 2016 is Rp3,750,000,000.00 (three billion seven hundred fifty million rupiah).

2. Gross income calculation takes into account:
   a. Gross Income is net interest income plus specific net non-interest operational income, calculated cumulatively from the beginning of January to the end of December each year. b. The method for calculating Gross Income is as stated in the Appendix of this Financial Services Authority Circular Letter.
   c. The method for calculating Gross Income as contained in the Appendix uses data submitted through the Monthly Report of Commercial Banks (LBU).
   d. For Banks with Sharia business units, the Gross Income calculation also takes into account Gross Income from Sharia business units after conversion according to the bank's business characteristics and Sharia principles. e. In the event that audited Financial Statements submitted by a Public Accounting Firm (KAP) contain corrections affecting the amount of Gross Income, the Bank must correct the RWA calculation for Operational Risk in the month following the submission of the audited financial statements by the KAP to the Bank.

Example:
A Bank calculates RWA for Operational Risk during January and February 2016 based on Gross Income for 2013, 2014, and 2015 (unaudited).
At the beginning of March 2016, the audited 2015 Financial Statements submitted by the KAP were delivered to the Bank.
Based on this report, the Bank calculates RWA for Operational Risk for March 2016 based on Gross Income for 2013, 2014, and 2015 (audited).

f. In the event that the average Gross Income calculation over the last 3 (three) years shows that the Bank experienced negative or zero Gross Income for 1 (one) or 2 (two) years, then for the calculation of the average annual Gross Income as referred to in item 1, the Bank must exclude the negative Gross Income value from the numerator and denominator when calculating the average Gross Income.

Example:
(in Million Rp)
Bank A | 2015 | 2014 | 2013 | 2012 | 2011
Gross Income | 800 | 1,200 | (750) | (1,750) | 3,000

Based on the data above, the capital charge for calculating RWA for Operational Risk is as follows:

1. For the 2016 position:
   RWA for Operational Risk = 12.5 x Operational Risk Capital Charge = 12.5 x [15% x {(800+1,200)/2}] = 1,875

Thus, the RWA for Operational Risk as of 2016 is Rp1,875,000,000.00 (one billion eight hundred seventy-five million rupiah).

2. For the 2015 position:
   RWA for Operational Risk = 12.5 x Operational Risk Capital Charge = 12.5 x [15% x {(1,200)/1}] = 2,250

Thus, the RWA for Operational Risk as of 2015 is Rp2,250,000,000.00 (two billion two hundred fifty million rupiah).

g. If the Bank experienced negative or zero Gross Income for the last 3 (three) years, then for the calculation of the average annual Gross Income as referred to in item 1, the Bank must calculate the Operational Risk Capital Charge using the last positive annual Gross Income.

Example:
(in Million Rp)
Bank A | 2015 | 2014 | 2013 | 2012 | 2011
Gross Income | (1,250) | (1,500) | (750) | 1,800 | 2,750

Based on the data above, the capital charge for calculating RWA for Operational Risk as of 2016 is as follows:

RWA for Operational Risk = 12.5 x Operational Risk Capital Charge = 12.5 x [15% x {(1,800)/1}] = 3,375

Thus, the RWA for Operational Risk as of 2016 is Rp3,375,000,000.00 (three billion three hundred seventy-five million rupiah).

3. Newly established Banks or Banks resulting from mergers or consolidations must calculate RWA for Operational Risk starting from January of the year following the year of establishment, merger, or consolidation of the Bank, using Gross Income during the initial year of establishment calculated for 1 (one) year.

Example:
a. Several Banks merge to become Bank A, which effectively operates starting from April 15, 2016. At the end of December 2016, the total Gross Income of Bank A was Rp750 million. Based on the regulation above, Bank A is not required to calculate RWA for Operational Risk until the end of the establishment year (2016). During 2017, starting from January 2017, Bank A calculates RWA for Operational Risk as follows:

RWA for Operational Risk = 12.5 x Operational Risk Capital Charge = 12.5 x [15% x {Rp750 million x 12/9}] = Rp1,875 million

b. Bank B was established and began operations on December 19, 2016. The total Gross Income of Bank B up to December 31, 2016 was Rp100 million. Based on the regulation above, Bank B is not required to calculate RWA for Operational Risk until the end of the establishment year (December 2016). During 2017, starting from January 2017, Bank B calculates RWA for Operational Risk as follows:

RWA for Operational Risk = 12.5 x Operational Risk Capital Charge = 12.5 x [15% x {Rp100 million x 12/1}] = Rp2,250 million

III. OTHER PROVISIONS

The Appendix to this Financial Services Authority Circular Letter is an integral part of this Financial Services Authority Circular Letter.

IV. CLOSING PROVISIONS

With the implementation of this Financial Services Authority Circular Letter, Bank Indonesia Circular Letter Number 11/3/DPNP dated January 27, 2009 concerning Risk-Weighted Asset (RWA) Calculation for Operational Risk Using the Basic Indicator Approach (BIA) is revoked and declared invalid.

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

Determined in Jakarta on July 14, 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