Regulations and Indonesian Banking System

Indonesian Banking System 

Banking laws in 1992 and 1998 divide the 2 types of banks in Indonesia. 
Commercial Bank offers a full service financial services including currency exchange. The Bank has access to the payment system and provide banking services in general. 
Perkreditan Bank Rakyat (BPR), is smaller than commercial banks, and generally operate in local. BPR can accept deposits but does not have access to the system of payment (clearing). 

Besides banks, there is a non-bank institutions such as the Village Credit Board (BKD) and rural credit unions (LDKP). 

Banking regulations → pesar developed since 1998 

Banking Act 1998 replaces the 1992 Banking Law: Defining the type of bank and its operating conditions and limits of each 
Bank Indonesia 1999: Set the BI as the central bank is independent and set up goals and tasks of the BI 
Audit and Compliance 1999: Defining the needs of the audit and compliance function in banks 
Commercial Bank 2000: Setting a permit and operational requirements of the commercial bank bank 
Know Your Customer Principles 2001: Defining the procedures and practices that should be used in identifying bank customers to monitor account activity and customer 
Fit and Proper Test 2003: Setting a fit and proper test conducted by BI mengkontrol to the shareholders and senior bank management 
Market Risk 2003: Defining the minimum capital requirement for commercial banks to consider the position of bank market risk 
Risk Management 2003: Defining the needs of bank risk management infrastructure 
Commercial Bank's Business Plan 2004: Setting a commercial bank must submit a business plan for the short & medium term 
BMPK 2005: Setting a concentration of credit risk of bank portfolios 
Information System debtor 2005: Require banks to report all information to the debtor, BI 
Sekuritisasi Assets 2005: Defining the principles to be followed by banks in their asset sekuritisasi 

BI also announced the Indonesian Banking Architecture (API) that define the direction, framework and structure of the banking industry working for 5 - 10 years. Changes will be implemented in stages to achieve the following: 
1. Strengthening the structure of the national banking system 
2. Improve the quality of banking regulation 
3. Improve the function of bank supervisors 
4. Improve the quality of bank operations and management 
5. Develop the banking infrastructure 
6. Improving the protection of customer

Economic Impact of 'Risk Event'

Over lending - a phenomenon that is cyclical 

Conditions in the Bank 'lent over' akan booming at the time of experience 'under lend' at the time of recession because of the recessionary impact of the investment bank because the bank must make clear to the book bad debts, so that without the new capital in the banks ability to distribute credit will be reduced. This is called 'procyclicality' effect, which can be seen clearly in the phenomenon 'asset bubbles' → excessive borrowing during the boom conditions the expectations of income, and not realistic assessment of assets that are not realistic, as happened in the real estate and stock market, the world . 

Procyclicality is a matter that will be the focus of the research on management and credit risk models. Basel II has been criticized over the potential increase in 'procyclicality' from the credit because it is the result of the credit grading models of capital a bank needs. So memburuknya credit grading of the loan will cause the rising capital needs regardless of whether bad debts increased or not. 


Market and Liquidity Risk 

Market risk events increases as the impact of increased trade in the asset market, where trading assets is not without problems. Mathematical model used to identify and understand the risk has long been used, but there is still a short distance before the results of calculation to be reliable indicators of trends in market risk. 

Liquidity crisis may rarely occur in the retail banking, but often occur in the wholesale market. Wholesale banks do not collect the funds, menjaminkan assetnya (such as government bonds and corporate) to seek funds. If the asset is not liquid (ie the investor does not want to buy or buy with low prices), there will be a liquidity crisis. For the impact of liquidity crisis to be done: 
Increasing vigilance bank supervisors 
Quick reaction from the central bank, and 
Strict monitoring of management by the bank. 

Changes in market conditions is one of the things that cause the formation of Basel II Accord is more sensitive to the risk. 

Sarbanes-Oxley (SOX) 

Bank supervisory agencies often implement new regulations to minimize the problem recurred again. Introduction of these regulations can result in not directly to the customer, through the implementation of cost or change the value of the bank. 

For example is the introduction of Sarbanes-Oxley Act in the United States in 2002 that requires that corporate accountability diundangkannya. Regulations are introduced after the accounting scandals bangkrutnya company as a result of Enron and WorldCom. 


International Accounting Standards (IAS) 

IAS in the year 2005-2006 will be introduced, especially in the European Union. This may affect: 
How to book a number of bank hedging in the top of the underlying interest rate risk in their banking book. There are several possibilities are not allowed to Hedge accounting purposes, thereby affecting the level of benefits and volatilitas bank. 
Transparency (disclosure) in bank accounting and reporting system, which is required according to Basel II Pillar 3 Disclosure namely. It is not usual to consider a new accounting regulations as a risk event. However, when the introduction of IAS alter the perception of bank profits in the future, it clearly is a risk event. Therefore, it is necessary explanations to the stakeholders on the impact of disadvantage is.

Failure to Manage Risk

Impact of risk 

In addition to direct financial loss, 'risk event' could result in the bank to the other stakeholders, namely shareholders, employees and customers as well as economy. 
direct impact on the financial losses of its shareholders and employees 
does not directly impact on customers and the economy 

Impact on shareholders 

Shareholders can be affected by: 
Total loss from investment - the company bangkrutnya 
The decline in value of investments - stock prices can go down because of damage to reputation, or a decrease in profits 
Losses due to a decrease in the dividend the company profit 
Indemnification obligations - shareholders may be held responsible for losses that occurred 

Impact erhadap employees 

Impact on employees, among others: 
Turuannya discipline employees because of negligence or kesengajaan 
Loss of income, for example: a decrease in bonus or salary increase 
PHK 

Impact on customers 

Impact on the customer can directly or indirectly, and possibly not directly identified. The impact can be long-term impact and provide for additional bank. Therefore difficult to calculate the total loss if a risk event involving the customer. 

Impact on bank customers, including: 
Decrease in levels of customer service 
Reduction in product offered by bank 
Liquidity crisis 
Changes in bank regulation 

Risk Operations and Customer Service 

In the event of an 'event plans' customers may be affected directly through: 
Quality of services that are less / wrong 
Dissolution → service-related technology 
Lack of security for customers 
There is no service at all 
This will affect bank profits because the customers will move to another place of business. This is important if the operational risk caused technical problems that affect thousands of customers. 

Impact of an 'operational risk event' to the next customer can cause financial losses for banks, namely: 
Payments to customers as compensation from the impact of indirect 
Cost of litigation 
Fines from the appropriate regulatory authorities

Other Risk

Risks categorized as Other Risk is: 

Business Risk 
Business risk is the risk associated with the competitive position of banks and the prospects for successful bank in the market conditions change. 
Although the business risk is not included in the definition of the Basel operational risk, but this risk should be the focus of senior bank management and board of directors. 
Risk business prospects include, among other short-term and long-term products and services that exist in the bank. 

Strategic risk 
Strategic risk is the risk associated with long-term business decisions by senior management of banks. Risk is also related to the implementation of the strategy. 
Strategic risk and business risk is the same, but different time period and the importance of the decision. Risks associated with strategic decisions such as: 
Business to what the bank will make investment 
Business is to be acquired, and / or 
Where and the extent to which business will be discontinued or sold. 

Reputation Risk 

Reputation risk is the risk of potential damage to the company due to the negative public opinion. 
Reputation risk not only limited to the reputation of a bank, but also to the banking industry. Although 'risk event' occurred in a bank, but the reputation of a product or sector can affect the entire banking industry. 
Currently, the risk of increased reputation and impact in terms of speed, that is because the market has global financial and trading occurs 24 hours a day. So that damage to the reputation of a bank can occur at any time and are reported in 'real time' throughout the world. 
Calculate the losses due to reputation risk is difficult because the impact of long-term and wide-spread.