Foreign banks undeterred by new capital regulation

The new capital regulation of the Indonesian central bank will unlikely deliver a major impact on foreign banks operating in the country, although it will require them to place a certain amount of funds in domestic debt papers as a capital buffer.

Citibank Indonesia chief country officer Tigor M Siahaan said that the new capital regulation would unlikely affect the bank’s business.

“We are still studying the rule, but most likely we will not change significantly [our business plan],” he said on the sidelines of the annual Bankers’ Dinner organised by the central bank last Friday.

Citibank would fully comply with the rule, Siahaan added. Nevertheless, he acknowledged that Indonesia’s banking industry “faced many challenges” that needed to be addressed so that the country could sustain its banking growth at the present level.

In his speech during the dinner, the central bank’s governor, Darmin Nasution, unveiled a set of new regulations, which among others required banks operating here as branches of foreign banks to have minimum capital of between 8 and 14 per cent of their third-party funds. The funds should be placed in debt papers either in corporate or government bonds.

The foreign bank will not be able to withdraw the money as only the central bank reserves the right to cash the bonds only when the bank hits difficulties.

“This policy is good for us,” said David Sumual, an economist with Bank Central Asia (BCA). “There are fears that if a crisis occurs overseas then a bank affected by the crisis can pull its money from its Indonesian branch. Therefore, this can act as ‘insurance’ for Indonesian depositors.”

Currently, there are at least 10 foreign banks operating in Indonesia under branch status, including Citibank, Standard Chartered, Bank of America, Bank of China Limited, Deutsche Bank, Bangkok Bank, Bank of Tokyo Mitsubishi and HSBC.

The central bank will formally issue details of the regulation, referred to by the central bank as Equivalence Maintained Assets (CEMA), between Monday and Tuesday this week, according to its director for banking research and supervision, Irwan Lubis. The foreign banks will start to place their CEMAs on June 30, 2013.

“On the one hand this may look protective,” said Fauzi Ichsan, an economist with the Indonesian branch of Standard Chartered, a UK-based foreign bank.

“But on the other, Indonesia has seen robust economic growth. The potential of the banking industry in Indonesia is so immense that foreign banks will not pull themselves from Indonesia.”

Ichsan argued that the implementation of CEMA might be a part of the central bank’s effort to push foreign banks currently operating as a branch to obtain legal entity status and operate as an independent company.

He referred to a recommendation from a recent Group of 20 nations meeting, which suggested governments around the world provide incentives to encourage foreign banks to become legal entities, as it would make foreign banks suffer less contagion effects if their parents overseas found themselves in a crisis.

In July, neighbouring country Singapore issued a regulation requiring foreign banks to be locally incorporated, meaning they must set up a local legal entity if they want to obtain a so-called “qualifying full bank” licence that allows a bank to have greater access to banking services there.