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June 12, 2017

IMF published its report on the Financial System Stability Assessment (FSSA) for Indonesia. This report is based on the work of a Joint IMF/World Bank Financial Sector Assessment Program (FSAP) mission to Indonesia during February 2017.

The FSSA reveals that the country's financial system has been stable and the banking system remains sound, although banks’ high profitability has fallen somewhat and problem loans have risen. Banks’ capitalization remains strong and well above the regulatory minima. Capital markets are relatively thin and external financing is important for long-term financing due to a small domestic investor base. Systemic risk is low and the banking system appears generally resilient to severe shocks. Under severe stress-test scenarios, banks experience sizable credit losses, particularly from corporate exposures; however, high capital levels and strong profitability help to absorb most of these losses and the resulting capital shortfalls are modest. Many banks face relatively small shortfalls in liquidity stress tests, including in foreign currency, and these appear manageable for Bank Indonesia. In addition, Bank Indonesia has developed analytical tools to assess systemic risk and has introduced several macro-prudential instruments.

Executive Directors commended the Indonesian authorities for undertaking major reforms since the 2010 assessment, notably the integration of financial sector supervision, the upgrading of the crisis management and resolution framework and the implementation of Basel III. Directors encouraged the authorities to build on this progress by implementing the recommendations of the FSSA to further enhance financial sector resilience, while also promoting financial deepening and inclusion based on a clear roadmap. Since the last FSAP, the authorities have implemented the Basel III capital framework, adopted a new insurance law, and improved supervisory practices across sectors. Importantly, in 2011, the Financial Services Authority (OJK) was established as an integrated regulator to oversee the entire financial sector. Directors stressed the importance of interagency cooperation in financial oversight and crisis management and welcomed in this regard the establishment of the OJK. They concurred that legislative amendments would be useful to clarify institutional responsibilities for OJK and Bank Indonesia that prioritize financial stability over development objectives, include a macro-prudential mandate for  Bank Indonesia, reduce overlap in supervisory activities, and improve legal protection for staff involved in supervision and crisis management. Directors also welcomed the progress in enhancing the framework for anti-money laundering and combating the financing of terrorism. They looked forward to continued efforts to address remaining deficiencies and align the framework with the revised Financial Action Task Force standard.

Related Link: FSSA Report (PDF) 

Keywords: Banking, Insurance, Securities, Asia Pacific, Indonesia, IMF, FSSA, FSAP, Basel III


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