Foreign banks undeterred by Indonesia's new capital regulation

Place funds in domestic debt papers.

Bank Indonesia’s new capital regulation requires foreign banks to do this to provide a capital buffer.

But it will unlikely deliver a major impact on foreign banks operating in the country.

“We are still studying the rule, but most likely we will not change significantly [our business plan],” said Citibank Indonesia chief country officer Tigor M. Siahaan.

Citibank would fully comply with the rule, Tigor added.

“On the one hand this may look protective,” said Fauzi Ichsan, an economist with the Indonesian branch of Standard Chartered, a foreign bank originating from the UK. “But on the other, Indonesia has seen robust economic growth. The potential of the banking industry in Indonesia is so immense that foreign banks will not pull themselves from Indonesia.”

There are at least 10 foreign banks operating in Indonesia under branch status, including Citibank, Standard Chartered, Bank of America, Bank of China Limited, Deutsche Bank, Bangkok Bank, Bank of Tokyo Mitsubishi and HSBC.

Bank Indoensia governor Darmin Nasution unveiled the new regulations, which among others required banks operating here as branches of foreign banks to have minimum capital of between 8 and 14 percent of their third-party funds. The funds should be placed in debt papers either in corporate or government bonds.

The foreign bank will not be able to withdraw the money as only BI reserves the right to cash the bonds only when the bank hits difficulties.

“This policy is good for us,” said David Sumual, an economist with Bank Central Asia (BCA). “There are fears that if a crisis occurs overseas then a bank affected by the crisis can pull its money from its Indonesian branch. Therefore, this can act as ‘insurance’ for Indonesian depositors.”

BI will formally issue details of the regulation, referred to by the central bank as Equivalence Maintained Assets.

Ichsan pointed out argued that the implementation of CEMA might be a part of BI’s effort to push foreign banks currently operating as a branch to obtain legal entity status and operate as an independent company.

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