Indonesian banks to maintain a countercyclical buffer on top of Basel III capital requirements

New year, new regulation.

Moody's reports that on 31 December, Indonesia’s central bank, Bank Indonesia (BI), issued a new regulation that requires Indonesian banks to maintain a countercyclical buffer on top of banks’ increased minimum capital requirements under Basel III, effective January 2016. The introduction of a countercyclical buffer is credit positive for Indonesian banks because it will add an additional layer of loss-absorbing capital during periods of rapid credit growth.

The initial countercyclical buffer requirement, which will be determined by BI at least once every six months, was initially set at 0% of banks’ risk-weighted assets, the low end of the 0%-2.5% range BI established.

Simon Chen, CFA, Vice President - Senior Analyst, Financial Institutions Group, Moody's Investors Service Singapore, says Indonesia is currently in a slowing cycle: the nation’s credit growth has fallen to 10% from a five-year average of 21%, and the outlook for economic growth is subdued. "We think these factors drove BI’s decision to set the initial buffer at 0%. The availability of this buffer provides BI with a tool it can use to compel banks to conserve capital and slow their balance sheet growth during the next credit upswing."

This development also completes the incorporation of all key aspects of the Basel III capital regime into the Indonesian capital framework, adds Chen. In addition to the countercyclical buffer, the other two buffers, namely capital conservation buffer and domestic systemically important bank (D-SIB) buffer, are already in effect.

"Following the introduction of the countercyclical buffer, the minimum common equity Tier 1 ratio (CET1) requirement rises to 12% by January 2019 for Indonesia’s D-SIBs from 5.75% currently, assuming the full incorporation of capital conservation, countercyclical and D-SIB capital buffers."

"Rated Indonesian banks are mostly well capitalized, and we expect them to meet the increased capital requirement without needing to raise additional capital. To the extent that the increase in the capital buffer prompts banks to conserve capital and slow their balance sheet growth, it would benefit their credit quality," notes Chen.