FRSGlobal : Risk Analysis and Regulatory Reporting

Regulators in Indonesia

Indonesia’s financial sector is supervised by:

• Bank Indonesia (BI)
• The Capital Market and Financial Institution Supervisory Board (BAPEPAM-LK)
• Directorate General of Taxation
• Indonesian Institute of Accountants

FRSGlobal in Indonesia

Indonesia has experienced strong economic expansion since recovering from the 1997 Asian financial crisis. Economic growth accelerated to a 10 year high of 6.3% in 2007 and a respectable 4.5% in 2009, making the country one of the best performers within the global recession.

Indonesia outperformed its regional neighbours and joined China and India as the only G20 members that posted growth during the global financial crisis.

However, despite these positive achievements, on 15^th June 2010 the Bank Indonesia’s (BI) board of governors of launched a policy package to face any challenges ahead, including balancing the structure of growth through greater investment, and deepening the financial market to support robust economic growth. BI, who has outlined its mission to achieve and maintain monetary stability and promote financial system stability for the country’s long term sustainable development, hopes to shift the maturity profile of transactions between BI and banks into a longer tenor in order to absorb unnecessary excess liquidity.

The new policies are expected to enhance the effectiveness of monetary policy, maintain macro stability and also strengthen the momentum of economic recovery. They include:

• The widening of the interbank money market interest rate corridor
• The enhancement on the requirements of net open position (NOP)
• The implementation of the one month minimum holding period in Bank Indonesia Certificates (SBI)
• The addition of non-securities monetary instruments in the form of term deposit
• The issuance of SBI with 9 and 12 months tenor; and
• The implementations of tripartite repurchase mechanism (repo) in Government Securities (SBN).

Regulatory Environment — Indonesia

Our reporting solution for Indonesia is designed to satisfy the reporting requirements of the Bank of Indonesia (BI) for Indonesian Banks with overseas presence and Foreign Banks in Indonesia.

Our reporting solution caters to capital adequacy, credit risk and Basel II requirements of banks supported through our Risk Measurement module.

Financial

Balance sheet reporting
Balance sheet reports need to be submitted to BI on a monthly basis through LBU (Laporan Bulanan Bank Umum). These reports contain balance sheet information like assets and liabilities, income statement, details of its balance sheet items, etc.

Position of In Country branches reporting
Banks need to submit the position of their branches in the foreign country to BI on a daily basis.

Profit and loss reporting
The profits gained or losses incurred need to be reported to BI on a monthly basis.

Prudential

Capital adequacy reporting
LBBU (Laporan Berkala Bank Umum) series are periodic reports that contain a bank’s position and qualitative reports. They comprise of weekly reports (third party fund reports - including Government weekly balance sheet reports), monthly reports (maturities profile, BMPK/ max credit limit, fund provision reports, CAR and calculation) and quarterly reports (sensitivity reports).

Securities reporting
All securities exposures in tradable securities of a bank need to be reported to Bank Indonesia on a quarterly basis.

Transactional

Daily transactional reporting
The activities performed by banks on a day to day basis like the functioning in the derivatives market, securities market, foreign exchange transactions and cash flow projections need to be reported to BI through LHBU (Laporan Harian Bank Umum) on a daily and monthly basis.

Derivative transactions reporting
All derivative transactions in forward, spot, and options trading with the foreign parties including buying and selling need to be reported to Bank Indonesia by end of day.

Foreign exchange transactions reporting
Exchange rate exposures in banking book and trading book are required to be reported on a quarterly basis.

What's Coming Up - Indonesia

Basel II

Pillar I
To fulfill the minimum capital requirement for credit risk, market risk and operational risk, the Bank of Indonesia (BI) made adjustments and revisions in regulations in February 2011 by issuing Circular letter no 13/6/DPNP for calculation of Risk Weighted Assets. Banks in Indonesia are required to submit the new format for ATMR (Risk Weighted Assets). The report is divided into six sub reports:

• Assets exposures in Balance Sheet
• • Liabilities commitment & contingent exposure in Off Balance Sheet
• Credit Risk exposure – counterparty credit risk
• Credit Risk exposure – settlement risk
• Securitised exposure
• Shariah unit exposure

Pillar II

The BI has recommended improvements in regulation of capital adequacy ratio calculation, based on risk profile after several discussions with the Basel II working group.

Pillar III

The BI has updated the bank’s financial reporting transparency in monthly and quarterly financial reporting (LKP – Laporan Keuangan Publikasi). Also in relation to implementation of regulation no. 13/5/DPNP – Transparency Information of Base Interest Credit Rate / Suku Bunga Dasar Kredit (SBDK) / Prime Lending Rate, BI is now supervising the implementation of that regulation. In the regulation, the BI has provided the format of the report, which contained 2 reports:

• Tabel komponen perhitungan Suku Bunga Dasar Kredit / component table of Prime Lending Rate Calculation – submit to BI
• Suku Bunga Dasar Kredit (Prime Lending Rate) submit to newsletter, website, etc

Basel III

The BI facilitated a workshop for the Basel III Quantitative Impact Study in banking capital in Indonesia which was attended by 14 representative banks in Indonesia. A Draft of consultative paper is being prepared and will constantly be updated.

To have comprehensive statistic data of Balance of Payment as the International standard, the BI issued regulation no. 13/15/PBI/2011 dated 23 June 2011 – Reporting of International Transaction Activities (LLD – Lalu Lintas Devisa) by Non Bank Institutions.

In response to the previous regulation about Short Term Offshore Loan & Working Capital of Foreign Bank branches, the BI issued revision regulation for LHBU no. 13/8/PBI/2011 implemented 2 May 2011 onward. The additional forms are:

• Form 407 – Daily Balance Report of Short Term Off Shore Loan
• Form 408 – Daily Position Report of Working Capital Foreign Bank

The BI is now also building a Debtor Information System (SID- Sistem Informasi Debitur) output for Individual Debtor Information (IDI) which will be used by financial institutions including banks to calculate risk or presentation of default of loan.

Asset & Liability Management (ALM)

ALM is being embraced as more than just a tool to monitor and manage interest rate risk in banking books. It is a process for managing balance sheets against other risks that affect earnings and portfolio valuations of banks, shifts in customer behaviour, future balance sheet growth and impact of business strategies (pricing, hedging, growth and planning).

In light of the recent financial crisis, firms of all shapes and sizes are re-evaluating their ALM model. In order to earn an adequate return, the need to assess and mitigate the adverse value and income impact of changes in the market has become even more vital.

So how do different types of financial institutions manage their ALM requirements today?

Large, tier 1 firms typically develop their ALM systems in-house; a luxury few smaller firms can’t afford. These systems typically include sophisticated and finely tuned functionality for Value exposure, Value at risk, Dynamic simulation, Earnings at risk and Treasury view.

In the past, smaller firms have found solutions for meeting ALM requirements to be over-complicated, difficult to integrate with incumbent systems, resource-dependent and cost-prohibitive. For these reasons they have resorted to using alternative methods such as spreadsheets or independent consultants, neither of which is ideal.

Until now the sheer cost of developing and supporting an in-house ALM system has been prohibitive to smaller firms but the need to have accurate visibility into the future position of the firm is critical.

Our heritage and in-depth knowledge of market have enabled the configuration of our solution to be so flexible that it meets the needs of ALL firms; from those with highly complex derivatives to those with a vanilla approach.

Our ALM solution provides a comprehensive range of capabilities that cover the following areas:

• Value exposure / market risk (static)
  For a consistent and comprehensive assessment of the adverse value impact of changes in market risk factors based on common pricing models using gap analysis and analytical/numerical stress testing analysis
• Value at risk / market risk (static)
  To calculate the loss potential of a specific portfolio or the total balance sheet over a given time horizon and confidence level
• Dynamic simulation (“what if” NII analysis)
  To assess and manage income, using a dynamically modelled balance sheet and market environment
• Earnings at risk (interest rate models)
  To calculate the potential to lose income, and to value it in a dynamically modelled balance sheet and market environment
• Treasury view
  To assess the exposure and risk position of Treasury, using the risk management techniques applied by the firm

And for the smaller firm

Our rich ALM solution offers a functionally that require immediate return on investment by taking a ‘compact’ approach with risk management features that absorb complexity. Along with evaluating a mismatch between assets and liabilities, our ALM solution also manages risks arising due to liquidity and interest rate in banking books.

With our ALM solution firms can:

• Quantify the value impact of interest rate changes over the total balance sheet based on regulatory requirements
• Conduct stress testing / value impact of any risk factor change over the total balance sheet
• Benefit from robust processes with audit ability and traceability, reverse processing from results to initial input using modelling (strategies & scenarios)
• Meet processing times / frequency of analysis and reduce manual work
• View Balance Sheet value impacts from interest rate moves in terms of sensitivity, liquidity and margin
• Utilise a simple financial analysis framework
• Make use of a flexible reporting tool and standard export to standard formats (Excel, PDF, HTML, XML)

FRSGlobal 6-step process for ALM

Basel II

Embracing advanced Basel II approaches and capital management practices

While some countries in Asia-Pacific and Japan were initially content with implementing basic and standardised approaches to Basel II, the trend towards more complex approaches to credit risk and market risk management has evolved as the Basel Committee on Banking Supervision continued to enhance its guidance for more sophisticated approaches to managing market, credit, and operational risk.

In implementing the Basel II framework, Bank Indonesia is essentially seeking to strengthen risk management so that banks will become more resistant to domestic, regional and international shocks.

Indonesia has implemented the simplest approaches and one of the most advanced approaches, Internal Rating Based (IRB) approach.

Banks in Indonesia are flexible to adopt the advanced approach provided that it would offer more benefits for the bank.

According to the IMF's Financial System Assessment the implementation of Pillar I will be from 2011 and the implementation of Basel II is expected from January 2014.

The FRSGlobal solution provides a sophisticated Basel II module with the ability to calculate the capital charge for market and credit risk as required under Pillar 1. For Pillar 2, interest rate risk in the banking book, liquidity risk and concentration risk are covered. DataFoundation enables the reporting requirements set out in Pillar 3. The Basel II compliance can be used as an independent stand alone solution or in combination with all the other FRSGlobal RiskPro and RegPro modules.

Capital Adequacy Reporting Videos

A series of videos explaining various aspects of Capital Adequacy Reporting.

• What is Capital Adequacy Reporting?



• What is the purpose of Basel?



• RiskPro or RegPro?



• What does the FRSGlobal solution cover?



• What are the analysis methods?

Adoption of the IFRS7 and IAS 32, 39

Employ dynamic ALM for better balance sheet management

Several Asian Countries such as Malaysia, Indonesia, Thailand and South Korea have introduced adoption plans for member banks to comply with international accounting treatments (or slight variations of them).

In indonesia, the convergence process is ongoing and the decision on the target date for full compliance with IFRS is expected to be made in 2012 .

The FRSGlobal IFRS solution is made up of both RiskPro and RegPro elements. FRSGlobal RiskPro enables the classification of financial instruments and the calculation of the valuation using either fair value or amortised cost as appropriate. RiskPro also supports several methods for testing and estimating impairment as required by IAS 39.

FRSGlobal RegPro uses ReportGenerator to produce standard IFRS report definitions with country adaptations as well as ReportBuilder to build additional standardised reports.

Read more about the FRSGlobal IFRS solution here.

Liquidity Risk Management

Banks are interested in going beyond simple static financial ratios and gap reports as the measures of their liquidity risk. Since the Basel Committee on Banking Supervision issued its final paper on ‘Principles for Sound Liquidity Risk Management and Supervision’ banks have been adopting liquidity stress testing scenarios to simulate bank-specific and system risks to their balance sheet. By modelling their liquidity contingency plans against such scenarios, a measure of the bank’s cash-flow survival horizon can be derived, giving a statement of the effectiveness of the bank’s plan against such crisis.