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Financial Identity Number FIN. To motivate public access toward inancial services, a
study is required upon the provisions that can support public easy access to inancial services, which covered in
the
Fourth Pillar,
namely policiessupporting regulations. In this pillar, the Government and BI will make eforts to
provide supports in a policy in the form of regulations issuance that can facilitate the communities in obtaining
inancial services. BI in year 2012 has issued multilicense provision. Meanwhile, the policies that will support the
facilitation of inancial services among others are policies of branchless banking and credit start-up.
Fifth Pillar
observes the importance of facilitating intermediation and distribution which emphasizes on
the eforts to increase awareness of inancial institutions toward the community groups’ potential to get inancial
services. BI, in its efort to enhance the facilitation of intermediation, in cooperation with Indonesian banking
has developed “TabunganKu” product which is a form of savings with a low administration cost. Eforts to increase
the outreach of formal inancial institution services to the community groups in rural areas are conducted through
branchless banking in which one of them contains the possibility of a mobile money application in Indonesia,
whereas cellular phones can be used as a means of saving money in the form of an account at a particular bank. It is
expected that remote areas can still get services of banking facility through the concept of branchless banking
without having to establish Bank oice infrastructures. On the credit distribution side, expansion of credit extension
outreach shall be conducted through the concept of credit start-up and land certiication.
Consumer protection is one of the advantages to be gained by public if they are associated with formal
inancial institutions compared to if they get connected with informal inancial service providers, given that
formal inancial service providers have regulator which implements governance and supervision including
regulation on protection for their consumers. This thing is relected in the
Sixth Pillar
of consumer protection. For instance, for bank customers, BI has required banks to
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communicate with any prospective customer the beneits, risks and costs contained in a inancial product, and
also to follow-up their customers’ complaints with clear process and deadline of settlement as well as to facilitate
the communities whose problems cannot be resolved by banks through the work unit that handles banking
mediation in BI.
Cross Pillar The achievement of efectiveness in the implementation of
the above six pillars, cannot be separated from a number of factors which together can be seen as cross-pillar activitie.
Those activities are among others a Improvement of supporting infrastructures physic and communication
and information technology, b Availability of database supply and demand sides that supports the process of
policy decision on inancial inclusion, c Encourage the establishment of credit bureau institutions that supports
inancial inclusion policy. By the enhancement of public access toward this inancial
service provision, the low income communities can also enjoy services such as depositssavings. From the deposit
pattern of the low income people, inancial institutions will know their customers better, so that it can open
inancing opportunities for prospective customers. Aside from that, the easy access to payment system services will
also afect to the smoothness of economic transactions, even toward the communities in remote areas. Buying
and selling process can be done more smoothly, and the communities can use advanced technology such
as cellphone to pay the purchase of raw materials from farmers in remote areas. Farmers would
not have to sell their agricultural produce with low prices due to limited
cash brought by the collector traders, as payment can be made using e-money now. This kind of things will support
the increase of economic activities that can improve living standard of the communities. That is also the case with
insurance services; the availability of micro insurances will help the communities anytime they must deal with
problems that can be covered by their insurances. Those things are expected to strengthen the society condition so
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Pillar 1 - Minimum Capital Requirements
Pillar 1 determines minimum capital requirements capital adequacy which are associated with credit risk, market
risk and operational risk. In this case, banks must maintain capital adequacy to cover risks faced. According to Basel
II documents, bank capital ratio, or the ratio between that they still continuously perform and participate in the
activities of economy.
C. Basel II
Capital is one of the main focuses of all bank supervisor authorities in conducting prudential principle. Therefore,
one of the regulations that need to be developed to strengthen banking system and becomes the bufer
against potensial loss is a regulation on capital adequacy. Considering the important role of bank capita, Basel
Committee on Banking Supervision BCBS has issued a concept of capital framework that becomes the
international standard. The initial concept of bank capital framework was issued in year 1988 which was then reined
in year 2006 by the issuance of International Convergence on Capital Measurement and Capital Standard A Revised
Framework document or better known as Basel II. Basel II is intended to enhance the resilience and
soundness of inancial system by focusing on the risk- based capital calculation, supervisory review process and
market discipline. In general, Basel II framework consists of three pillars, i.e. Pillar 1: capital adequacy minimum capital
requirements; Pillar 2: supervisory review process; and Pillar 3: market discipline.
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regulatory capital and weighted average assets according to risk ATMR should not be less than 8.
Pillar 1 of Basel II introduces several alternatives approaches in calculating capital charges of credit risk, market risk and
operational risk. Those approaches started from a simple approach to complex approach and can be adjusted
according to the level of complexity of the products and activities of the bank. For the initial stage, banks should use
the simple approach to calculate capital charges of credit risk, market risk and operational risk. Bank may use a more
complex approach provided that the bank is ready and able to conduct capital charges calculation with a more
complex approach and also has been granted approval from the supervisory authority.
Pillar 2 - Supervisory Review Process
Pillar 2 requires a review process conducted by supervisors to ensure that bank capital is adequate to fully cover the
bank risks. In accordance with the four 4 principles of Pillar 2, banks must own a process to assess capital adequacy
comprehensively which related to the risk proile and strategy to maintain their capital adequacy or known as
Internal Capital Adequacy Assessment Process – ICAAP Principle 1. On the other hand, supervisors will review
adequacy of evaluation process conducted by banks or referred to as Supervisory Review and Evaluation Process
– SREP principle 2. Meanwhile, according to principle 3, supervisors expect banks to operate above the minimum
regulatory capital ratio and in accordance with principle 4 supervisors may conduct intervention to prevent
declining capital below the minimum level required and then request banks to take immediate actions in the event
the capital cannot be maintained. In performing SREP as referred to in Principle 2 stated
above, supervisors may calculate bank capital adequacy toward:
1. Risks that still cannot be fully measured in Pillar 1
due to the use of standard approaches by bank, for instance concentration risk;
2. Risks that have not been calculated in Pillar 1, among others, liquidity risk, interest rate risk in banking book,
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reputational risk and strategic risk. Some of the said risks cannot be measured quantitatively so as to be
more like qualitative interpretations including risks from bank external factors that might arise due to the
policy, and economic or business conditions.
Pillar 3 - Market Discipline
To complete the other two pillars, Pillar 3 of Basel II determines a disclosure requirement that makes it possible
for market participants to assess primary information concerning risk exposures, process of measuring risks
and capital adequacy of banks. In principle, pillar 3 aims to encourage the creation of a sound banking business
environment, among others by increasing transparency to public so that the public can participate in supervising
bank business activities. Several main prerequisites in order that the objectives can
be achieved are, among others: 1. Availability of adequate information for public
regarding bank condition; and 2. Public ability in assessing bank condition through
analyses on the available information.
Implementation of Basel II in Indonesia Framework of Basel II Pillar 1, Pillar 2, and Pillar 3 in
Indonesia has been implemented in full since December 2012. Some regulations related to the implementation of
the Basel II among others are:
Pillar 1
1. Circular Letter SE No. 136DPNP concerning Guidelines on Calculation of Risk-Based Weighted
Assets ATMR for Credit Risk using standard approach. The regulation has come into force as of January 2012,
requiring banks to compute credit risk exposure using the standard approach.
2. Calculation of Market Risk is stipulated in SE No. 1421 DPNP concerning Revision on SE No.933DPNP of
BI dated 18 December 2007 concerning Guidelines on Standard Method Utilization in the Calculation
of Capital Adequacy Requirements for Commercial
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Banks by Taking into Account Market Risks. Besides, for banks that will use an internal model, regulation
on the said matter is stipulated in SE No. 931DPNP concerning Guidelines on Internal Model Utilization
in the Calculation of Capital Adequacy Requirements for Commercial Banks by Taking into Account Market
Risks.
3. Meanwhile, calculation of operational risk is stipulated in SE No. 113DPNP concerning Calculation of ATMR
for Operational Risk Using Basic Indicator Approach.
Pillar 2
In relation to pillar 2 Supervisory Review Process, Bank Indonesia has issued a provision that requires banks to
provide minimum capital according to their risk proiles. The said provision is stipulated in Bank Indonesia
Regulation PBI No. 1418PBI2012 on Minimum Capital Adequacy Requirement KPMM for Commercial
Banks based on Risk Proiles and Fulillment of Capital Equivalency Maintained Assets CEMA, entered into force
as of December 2012. Through the said provisions, banks are required to provide minimum capital based on risk
proiles with the following ranges: 1. Bank with a risk proile
3
of rating-1, a minimum capital of 8
2. Bank with a risk proile of rating-2, a minimum capital of 9 up to 10
3. Bank with a risk proile of rating-3, a minimum capital of 10 up to 11
4. Bank with a risk proil of rating-4 or 5, a minimum capital of 11 up to 14
Pillar 3
In order to increase market discipline, BI has issued PBI No. 1414PBI2012 concerning Transparency and Publication
of Bank Reports and SE No. 1435DPNP concerning Annual Reports of Commercial Banks and Speciic
Annual Reports Submitted to BI. In the abovementioned
3
What it means by risk proile is a Bank risk proile as stipulated in the regulation of Bank Indonesia concerning Assessment of Commercial Bank
Soundness Rating.
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regulations, more comprehensive disclosures are regulated, i.e. concerning risk exposures owned by banks,
risk mitigations conducted, and capital adequacy of banks, in line with the requirement in Pillar 3 of Basel II.
With the issuance and application of the said regulations, implementation of Basel II comprehensively can be
achieved, so that Indonesian banking industry that is more sound, more capable to survive crisis condition, and more
competitive in global inancial industry, can be created. This will further encourage the improvement of a sound
Indonesian inancial system.
D. Basel III
In order to respond to 2008-2009 global inancial crises, the Leaders Summit in year 2008 held in Washington D.C.
has agreed on 50 steps of the world economic rescue or known as Washington Action Plans WAP. To follow-up
the said rescuing measures, G-20 has given a mandate to Basel Committee on Banking Supervision BCBS to
formulate a package of global inancial reformation
4
which aims to enhance the resilience both at micro level and at
macro level. The resilience enhancement at micro level shall be carried out by improving quality and quantity
of bank capital as well as the resilience and adequacy of bank liquidity. Meanwhile, the resilience enhancement
at macro level is conducted by applying conservation bufer, leverage ratio that can help mitigating risks that
disrupt inancial system, countercyclical capital bufer to reduce procyclicality and also requires banks or inancial
institutions that are systemic in nature to provide bufer. In accordance with BCBS documents, Basel III framework
will start being applied in January 2013 gradually until it reaches its full implementation in January 2019.
4
BCBS has issued two 2 documents as parts of global inancial reformation package, i.e. A Global Regulatory Framework for More Resilient Banks and
Banking System, and International Framework for Liquidity Risk Measurement
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In general, the coverage of Basel III is as follows:
