ROAD MAP OF IMPLEMENTATION BASEL II IN INDONESIA

Notes:

1. During parallel run, banks submit reports offline
2. Updated calculation of market risk according to Basel II
3. Banks may use this approach provided that they meet the prescribed requirements and have approval from BI
4. Includes interest rate risk in the banking book, reputational risk, strategic risk, etc.

All the above deadlines are targets for completion

:: Pillar 1. Necessary Steps:

• National Discretion : (i) Supervisory authority must establish definitions, approaches and thresholds for implementation; (ii) Establish prudential standards and rules for compliance
• Quantitative Impact of Basel II : (i) Provide operational framework for banks; (ii) Measure potential impact on capital
• Assessment of Bank Practices and Readiness : (i) Assess readiness, gaps and implementation challenges; (ii) Hold bilateral dialogues
• Prepare Banks for Implementation : Encourage banks to make the necessary improvements for use of more sophisticated approache
• Development of Supervision/ Examination Guidelines : (i) Prepare qualification guidelines for advanced approaches; (ii) Prepare guidelines for examiners in evaluating bank compliance with standards
• Approval Process : (i) Communicate transition process for the approaches to be used; (ii) Facilitate progress in the implementation plan
• Exchange of information among supervisory authorities : (i) Facilitate crossborder supervision; (ii) Hold dialogues on challenges and obstacles in implementation

:: Pillar 2. Supervisory Issues, key issues for which adequate preparations are essential:

• Do banks already have a suitable internal capital adequacy assessment process (ICAAP)? How does one define a ‘sound’ framework?
• How should the supervisor implement the supervisory minimum standards when assessing the quality of a bank’s ICAAP?
• Are there standards for measuring ‘other material risks’?
• How do supervisors ensure the objectivity and transparency of the Pillar 2 process?

:: Pillar 3. The following are some necessary steps:

• Assess the gap between current and Basel II disclosure requirements
• Upgrade the supporting infrastructure for transparency
• Review overlaps between accounting and Basel II requirements
• Identify various preconditions necessary to ensure that improvement in scope and quality of disclosure will promote market discipline
• Formulate a method for assessing the effectiveness of Pillar 3

POSITION PAPER WORKING GROUP OF BASEL II IMPLEMENTATION

The "International Convergence of Capital Measurement and Capital Standards - A Revised Framework" (Basel II), issued by the Basel Committee on Banking Supervision at the Bank for International Settlements (BIS), is a revised and updated version of the Basel Accord 1988 (Basel I). This framework provides a more risk-sensitive definition of capital adequacy and contains incentives for banks to improve their risk management. Basel II is specifically aimed at internationally active banks and seeks to strengthen the security and soundness of the international financial system by emphasising risk-based calculation of bank capital, the supervisory review process and market discipline. The Basel II Framework is based on a forward-looking approach that enables improvements and adjustments to be made over time. In this way, the Basel II framework is able to keep pace with changes in the marketplace and advances in risk management.

For the G10 nations themselves, Basel II comes into force by the end of 2006. Nevertheless, this timeframe is not binding on non-G10 nations, given that in the development of their supervision processes, each country has different priorities. Among these priorities is improved compliance with the Basel Core Principles for Effective Banking Supervision (BCPs). The state of preparedness for compliance with the various preconditions for Basel II is a key factor in the timeframes adopted by individual countries. The preparedness encompasses such areas as quality of risk management and of information systems and databases in the banking system. In addition, Basel II implementation is dependent on the condition of infrastructure, which includes accounting standards and establishment of a rating agency, and readiness on part of the supervisory authority, particularly in the area of national discretion.

n August 2004, Bank Indonesia conducted a survey to ascertain bank perceptions of Basel II and the expectations and preferences of banks for implementation of Basel II in Indonesia. The survey also sought information on levels of preparedness, obstacles and constraints faced by Indonesian banks in regard to the planned implementation of Basel II.

Attachment : Position Paper Working Group of Basel II Implementation

:: Establishment of the Special Team in Preparation for Implementation of the Basel II

Steering Committee

1. Director of Banking Research and Regulation Chair
2. Bureau Chief of Banking Research and Regulation Member
3. Chair of the Association of State Banks (Himbara) Member
4. Chair of the Association of National Banks (Perbanas) Member
5. Chair of the Association of Foreign and Joint Venture Banks Member
6. Chair of the Association of Regional Banks (Asbanda) Member
7. All Banking Sector Directors at Bank Indonesia Member

Attachment : Decree of the Governor of Bank Indonesia No. 8/32/KEP.GBI/2006 concerning Establishment of the Special Team in Preparation for Implementation of the Basel II Bank Capital Framework in Indonesia