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Q & A

SHORT-TERM FUNDING FACILITY (STFF)

1. What is STFF?

• STFF is an abbreviation for Short-Term Funding Facility (STFF); one of the facilities that supports Bank Indonesia’s function as Lender of Last Resort. STFF is regulated through a Bank Indonesia Regulation (PBI) as mandated by UU BI No. 23 1999 – Article 11, Paragraph 1 and UU BI No 3 2004 Article 11, Paragraph 1.

• The PBI stipulates that Bank Indonesia may extend credit to banks with high-quality, liquid collateral. The first regulation promulgated was PBI No 1/1/PBI/1999 dated 18th May 1999, subsequently amended by PBI No 5/15/PBI 2003 dated 14th August 2003 and PBI No 7/21/PBI/2005 dated 3rd August 2005.

• Article 11, Paragraph 2 of the BI Act states that: high-quality, liquid collateral includes bonds and/or papers issued by the Government or other high-ranking legal entity based on the assessment results of a competent assessor that can easily be sold on the market in exchange for cash.

• With the introduction of a regulation in lieu of a law (PERPU), which amends Article 11, Paragraph 2 of the BI Act, a further amendment to STFF regulations was achieved through the issuance of PBI No. 10/26/PBI/2008 dated 30th October 2008, subsequently amended further by PBI No. 10/30/PBI/2008 dated 14th November 2008.

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• Indonesian economic conditions were indirectly affected by the global financial crisis (ref. Governor of Bank Indonesia Report to the President dated 4th October 2008). Such conditions continued to deteriorate further, as marked by several important events as follows:

Date Event

8-10 October 2008

Indonesian Stock Exchange is temporarily suspended

28 October 2008 JSX: 1111.4, the lowest since December 2005 29 October 2008 SUN Price Index (IDMA): 67.11, the lowest since

SUN was first issued in January 2005 6 November

2008

Financial Stability Index (FSI) Development Report in October 2008 recorded at 2.40, far exceeding indicative target of 2.0 and higher than its position in September 2008 of 1.70.

August–

November 2008

Slump in Bank Deposits and Interbank money market (PUAB) segmentation

November 2008 Rupiah exchange rate depreciates to Rp12,000. Previously stable in the Rp9,000 range

• A number of Central Banks and/or Financial Authorities in other countries implemented similar responses, namely formulating policy aimed at minimizing instability in the financial market and maintaining macro stability by preserving sufficient liquidity in the financial market, alleviating risk and restoring depositor confidence. For example, some of the policies instituted include:

a. Lowering policy rates

i. Among others USA, UK, ECB, Canada and Korea. Stimulate economic growth that had slowed. Reduce

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cost of borrowing. Indonesia: different conditions, marked by strong economic growth.

b. Supplementing liquidity in the economy through unconventional means such as purchasing bonds from the private sector directly, Commercial Paper Funding Facility, etc (USA, ECB, Canada, Japan, Australia, Chile). Supplementing liquidity but avoiding flooding.

c. Lowering the Minimum Statutory Reserve (GWM)

Such as China, India, Brazil and Chile. To supplement domestic liquidity.

d. To retain public confidence in the banks, interbank deposit insurance was implemented in USA, UK, Greece, Denmark and Ireland, among others.

e. Blanket guarantee in Singapore, Malaysia, and Hong Kong. f. Bail outs for the banking system through recapitalization.

Such as USA and UK.

g. Foreign Exchange Intervention, such as Korea, Brazil and Thailand

h. Request IMF assistance: Pakistan, Hungary, Iceland, Ukraine and Belarus.

• Considering the crisis conditions in October 2008, the Government issued PERPU No, 2 2008 dated 13th October 2008 as an amendment to Article 11 of the BI Act so that it reads:

Article 11

(1) Bank Indonesia can extend credit or funds based on Sharia Principles for a maximum of 90 days to a Bank in order to overcome short-term funding problems.

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(2) Credit or funding allocation as referred to in Paragraph (1) must be insured by the beneficiary Bank using high-quality collateral with a minimum value equal to the value of the credit or funds received.

(3) Implementation of Paragraphs (1) and (2) is legislated through Bank Indonesia regulations.

(4) If a Bank with systemic impact suffers financial difficulties and has the potential to cause a crisis that endangers the financial system, Bank Indonesia can provide an emergency funding facility, for which the Government is liable.

(5) Regulations and the decision-making procedure to determine a Bank’s (with systemic impact) financial position, emergency funding facility and funding that is sourced from the State Budget are legislated in a separate Law.

Explanation of Article 11 Paragraph (1)

Credit or fund allocation to a Bank based on Sharia Principles is only permitted in order to resolve a mismatch between the fund inflow and fund outflow.

“Day” refers to a calendar day. The maximum 90-day period referred to in this paragraph is the maximum time period permitted, including any extensions.

If Sharia based credit or funds cannot be repaid on the due date, Bank Indonesia retains the exclusive right to cash any collateral in its possession in accordance with prevailing regulations. Banks eligible for liquidity assistance must fulfill all conditions stipulated by Bank

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Indonesia based on the information received by Bank Indonesia. The bank must be suffering short-term liquidity problems, have sufficient collateral and must agree to further investigation as necessary.

Paragraph (2)

“High quality collateral” includes bonds and/or papers issued by the Government or other high-ranking legal entity based on the assessment results of a competent assessor that can be sold on the market in exchange for cash and own collectible credit assets.

Examples of “Funding based on Sharia Principles” include profit sharing or proportional risk sharing.

3. What are the follow-up measures of the Perpu?

• Based on the PERPU, PBI No 10/26/PBI/2008 dated 30th_October 2008 was issued, further regulating collectible credit assets.

• STFF requirements still feature STFF as a service offered to a bank with short-term liquidity problems. Therefore, the criteria required by a bank in order to receive STFF are collectible credit assets.

• The requirements refer to a bank’s condition under a normal situation with liquid credit, namely: a Bank eligible to apply for STFF must have a minimum capital adequacy ratio of 8%. Assets suitable for use as STFF collateral (article 4 paragraph 3) must fulfill the following criteria:

o Collectible for the last 12 months;

o Excludes consumption credit with the exception of mortgages (KPR);

o Credit is insured with a minimum value of collateral totaling 110% of the credit ceiling;

o Excludes credit extended to a third party affiliated with the Bank;

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o Excludes restructured credit;

o The repayment deadline is a minimum of 3 months after STFF approval;

o Outstanding credit does not exceed the credit ceiling or maximum credit allocation limit; and

o The credit agreement and collateral arrangements are legally binding.

4. Why did Bank Indonesia amend PBI STFF on 14th November 2008? And is it true that the amendment was solely for Century Bank?

The amendment to STFF regulations was a response to the urgent requirement to strengthen bank resilience that had entered a disquieting phase; it was in no way linked to an individual bank. Conditions at that time were typified by:

PUAB segmentation – as a consequence of such segmentation, banks suffering liquidity shortfalls (and unsuccessfully seeking loans from PUAB) were unable to perform REPO SUN and SBI to BI (due to lack of SUN/SBI ownership), and therefore must fulfill their liquidity requirement through the STFF facility offered by Bank Indonesia.

A reduction in deposits at 23 banks – deposits declined at a total of 23 banks. The peak occurred from September to November 2008. Three state-owned banks received a total of Rp15 trillion from the government to supplement their liquidity. The ratio of liquid assets to non-core deposits (NCD) plummeted from 129.2% in January 2008 to 84.9% in October/November 2008. Under normal conditions, the ratio of liquid assets to NCD typically exceeds 200%.

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Such conditions were discussed at the Governors’ Board Meeting on 5th November 2008, including prevailing economic conditions (such as exchange rate depreciation) and banking system conditions (PUAB segmentation, decline in bank deposits, etc) and the following recommendations were put forward:

a. Review STFF collateral requirements for credit assets by redefining which credit assets could be collateralized;

b. Review STFF application requirements with regards to CAR and introduce a transition period.

c. Exercise Commercial Bank debtor data that meets the STFF collateral credit asset requirements through the Debtor Information System (DIS).

• On 13th_{November 2008, the Board of Governors amended PBI No} 10/26/PBI/2008 dated 30th October 2008 to PBI No 10/30/PBI/2008 dated 14th November 2008.

• The PBI was adjusted in order to maintain banking system stability and protect the domestic economy amid the global financial crisis. Therefore, it was necessary to broaden access to STFF for banks suffering financial difficulties. The PBI was a temporary measure taken while the crisis continued to endure. Consequently, PBI No 10/30/PBI/2008 represents one of the policy responses taken from existing macro conditions as reflected by deteriorating economic indicators.

• A comparison table after the PBI STFF amendment is as follows: PBI No 10/26/PBI/2008

dated 30th October 2008

PBI No 10/30/PBI/2008 dated 14th November 2008

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Article 2, Paragraph (2)

Banks with a minimum capital adequacy ratio of 8% are eligible to apply for STFF

Article 2, Paragraph (2)

Bank with a positive capital adequacy ratio are eligible to apply for STFF

Article 4, Paragraph (3)

Credit assets that are suitable for STFF collateral as referred to in paragraph (1) letter b must fulfill the following criteria:

a. Collectible for the last 12 months;

b. Excludes consumption credit with the exception of mortgages (KPR);

c. Credit must be insured using collateral with a minimum value of 110% of the credit ceiling;

d. Excludes credit extended to a third party affiliated with the Bank;

e. Excludes restructured Credit;

f. The repayment deadline is a minimum of 3 months after STFF approval; g. Outstanding credit does

not exceed the credit ceiling or maximum credit allocation limit; and

Article 4, Paragraph (3)

Credit assets that are suitable for STFF collateral as referred to in paragraph (1) letter b must fulfill the following criteria:

a. Collectible for a minimum of the last 3 months;

b. Excludes consumption credit with the exception of mortgages (KPR);

c. Excludes credit extended to a third party affiliated with the Bank;

d. Collateralized credit assets;

e. Outstanding credit does not exceed the credit ceiling or maximum credit allocation limit; and

f. The credit agreement and collateral arrangements are legally binding.

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h. The credit agreement and collateral arrangements are legally binding.

Article 17A

Bank Indonesia places beneficiary Bank under special supervision status.

5. Is it true that the CAR of Century Bank was negative at the time of STFF approval on 14th November 2008?

• When STFF was approved for Century Bank on 14th_{November 2008} the most recent CAR data was from 30th September 2008 and was positive at 2.35%

• The CAR data used by BI is the balance per bank branch (branch office) submitted online by the respective bank through its Commercial Bank Report (LBU) at the beginning of each month for the previous month. Based on that system, the balance per bank office is sent to BI. The time permitted for each bank to submit its report is up to the 20th of that month. All of the reports from the branch offices of the 123 banks are then compiled and processed simultaneously. The process takes two days. The results are subsequently forwarded to bank supervisory system (SIMWAS) on the 22nd or 23rd. Following further processing in SIMWAS, bank supervisors can finally retrieve the balance data through SIMWAS on the 25th. Therefore, the CAR for October 2008 is only available to bank supervisors on 25th November 2008.

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• However, due to the dire liquidity problems suffered by Century Bank, Bank Indonesia endeavored to acquire the balance on 31st October 2008 in order to calculate the CAR position. To this end, on 11th November 2008 the supervisors stationed at Bank Century requested the respective bank officials to submit their balance and CAR calculation for the position on 31st October 2008. However, Century Bank officials were unable to fulfill this request.

• Therefore, considering the extreme urgency to resolve the liquidity problems at Century Bank, BI used existing CAR data when approving STFF on 14th November 2008, namely the position for September 2008 at 2.35%.

6. Is it true that the value of collateral put forward by Century Bank upon receiving the STFF was only 83% of the ceiling and, therefore, insufficient to fulfill the requirement of 150%?

• Pursuant to PBI STFF (PBI No 10/26/PBI/2008 dated 30th_October 2008; amended by PBI No 10/30/PBI/2008 dated 14th November 2008 regarding STFF for commercial banks), STFF collateral is in the form of bonds (SBI, SUN), papers issued by other legal entities (corporate bonds) and receivables owned by the bank from debtors (credit assets).

• The requirements for credit assets as STFF collateral are as follows: • Collectible for a minimum of the last 3 months;

• Excludes consumption credit with the exception of mortgages (KPR);

• Excludes credit extended to a third party affiliated with the Bank;

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• Collateralized credit assets;

• Outstanding credit does not exceed the credit ceiling or maximum credit allocation limit; and

• The credit agreement and collateral arrangements are legally binding.

• The amount of credit assets is equal to outstanding credit and does not depend on the collateralized value of the credit assets.

• The STFF grant to Century Bank totaled Rp689 billion, insured with SUN amounting to Rp9.94 billion and credit assets of Rp1.021 trillion. Therefore, the STFF was insured to a value of Rp1.031 trillion or 150% of the STFF received.

• The figure of 83% arose because The Audit Board of Indonesia calculates STFF insurance using two criteria: (1) credit assets valued based on outstanding debits according to prevailing regulations; (2) credit assets are assessed based on their collateral value, which does not concur with the stipulations found in the STFF regulation. The Audit Board’s calculation for (2) refers to a BI internal memorandum, which actually includes an inaccurate interpretation by several parties in BI regarding the definition of credit assets used as collateral for STFF.

• As a result, it is not true that the value of collateral used by Century Bank upon receiving STFF was only 83% of the ceiling.

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When the crisis began to peak, an array of policy responses were instituted by Bank Indonesia together with the Government. Therefore, it should be clearly understood that the STFF facility is merely one of many policy responses used to offset the impacts of the global crisis.

The policies are as follows:

No Date Policy

1 16 Sep 2008 BI lowered O/N repo rate from BI rate plus 300 bps to BI rate plus 100 bps

BI adjusted FASBI rate from BI rate minus 200 bps to BI rate minus 100 bps

2 23 Sep 2008 BI extended the Fine Tune Operation (FTO) period from 1-14 days to 1 day-3 months (PBI No 10/14/PBI/2008).

3 13 Oct 2008 BI changed the regulations governing rupiah statutory reserves and foreign exchange statutory reserves for Commercial Banks (PBI No 10/19/PBI/2008).

4 13 Oct 2008 BI eliminated the daily balance limit on short-term Overseas Loans (PLN) (PBI No 10/20/PBI/2008). 5 13 Oct 2008 Issued PERPPU No 2. 2008 as an amendment to

the Bank Indonesia Act, which enables collectible credit to be used as collateral for the Short-Term Funding Facility (STFF).

6. 13 Oct 2008 Issued PERPPU No 3. 2008 to extend the insurance coverage of customer savings by DIC from Rp100 million to Rp2 billion.

7. 15 Oct 2008 BI extended the FX Swap tenure from a maximum of 7 days to 1 month (PBI No 10/21/PBI/2008).

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8. 15 Oct 2008 BI committed to provide foreign exchange for domestic corporations through banks (PBI No 10/22/PBI/2008)

9. 15 Oct 2008 Issued PERPPU No 4. 2008 regarding the Financial System Safety Net.

10. 24 Oct 2008 BI issued an amendment to PBI No 10/19/PBI/2008 in order to refine the calculation for rupiah statutory reserves to primary reserves of 5% from rupiah deposits and secondary reserves of 2.5% from rupiah deposits (PBI No 10/25/PBI/2008).

11. 29 Oct 2008 Bank Indonesia activated the Crisis Management Protocol Team (RDG 29th October 2009).

12. 30 Oct 2008 BI issued a regulation concerning the Short-Term Funding Facility for Commercial Banks (PBI No 10/26/PBI/2008).

13. 13 Nov 2008 BI issued a regulation to limits speculative foreign exchange transactions against the rupiah by enforcing underlying transactions for all foreign exchange purchase exceeding USD100,000 (PBI No 10/28/PBI/2008).

14. 14 Nov 2008 BI issued amendment to PBI No 10/26/PBI/2008 regarding the Short-Term Funding Facility (STFF) for Commercial Banks (PBI No 10/30/PBI/2008). 15. 18 Nov 2008 BI issued regulation on Emergency Loan Facility

(FPD) (PBI No 10/31/PBI/2008).

16. 16 Dec 2008 BI prohibits derivative transactions of structured products related to foreign exchange transactions (PBI No 10/38/PBI/2008).

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Article 2, Paragraph (2)

Banks with a minimum capital adequacy ratio of 8% are eligible to apply for STFF

Article 2, Paragraph (2)

Bank with a positive capital adequacy ratio are eligible to apply for STFF

Article 4, Paragraph (3)

Credit assets that are suitable for STFF collateral as referred to in paragraph (1) letter b must fulfill the following criteria:

a. Collectible for the last 12 months;

b. Excludes consumption credit with the exception of mortgages (KPR);

c. Credit must be insured using collateral with a minimum value of 110% of the credit ceiling;

d. Excludes credit extended to a third party affiliated with the Bank;

e. Excludes restructured Credit;

f. The repayment deadline is a minimum of 3 months after STFF approval; g. Outstanding credit does

not exceed the credit ceiling or maximum credit allocation limit; and

Article 4, Paragraph (3)

Credit assets that are suitable for STFF collateral as referred to in paragraph (1) letter b must fulfill the following criteria:

a. Collectible for a minimum of the last 3 months;

b. Excludes consumption credit with the exception of mortgages (KPR);

c. Excludes credit extended to a third party affiliated with the Bank;

d. Collateralized credit assets;

e. Outstanding credit does not exceed the credit ceiling or maximum credit allocation limit; and

f. The credit agreement and collateral arrangements are legally binding.

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h. The credit agreement and collateral arrangements are legally binding.

Article 17A

Bank Indonesia places beneficiary Bank under special supervision status.

5. Is it true that the CAR of Century Bank was negative at the time of STFF approval on 14th November 2008?

• When STFF was approved for Century Bank on 14th_{November 2008}

the most recent CAR data was from 30th September 2008 and was positive at 2.35%

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6. Is it true that the value of collateral put forward by Century Bank upon receiving the STFF was only 83% of the ceiling and, therefore, insufficient to fulfill the requirement of 150%?

• Pursuant to PBI STFF (PBI No 10/26/PBI/2008 dated 30th_October

2008; amended by PBI No 10/30/PBI/2008 dated 14th November 2008 regarding STFF for commercial banks), STFF collateral is in the form of bonds (SBI, SUN), papers issued by other legal entities (corporate bonds) and receivables owned by the bank from debtors (credit assets).