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Indonesia sets new capital norms for financial conglomerates

[JAKARTA] Indonesia's financial regulator has changed requirements around how the country's banking and financial services conglomerates report their capital buffers in an effort to make capital risks more transparent.

Under the new rules, a conglomerate's aggregate net equity must be at least as much as the total required regulatory capital of each of its business units, Indonesia's Financial Services Authority (OJK) said in a document posted on its website last week.

Most of Indonesia's financial assets are managed by conglomerates and OJK has previously said they need to tighten regulation for those firms as they have a systemic impact to the sector. Previously, financial conglomerates did not have aggregate capital requirements.

As part of capital calculations, the OJK will require conglomerates to measure net equity as the total capital of the parent company and its units, minus the injection or fund placement from parent companies to the units.

The regulatory capital requirements for each type of business were not changed - banks still have to maintain a capital adequacy ratio of at least at 8 percent of risk-weighted assets, while insurance firms must maintain a solvency ratio of at least 120 per cent.

However, because OJK subtracts capital injections from a conglomerate's aggregate net equity, the parent company may be forced to raise its capital to make sure the holding meets the new requirements. "In line with the complexity and the risks faced by financial conglomerates, they must manage a sufficient capital," the OJK said in the document.

The new rules take effect in December, however, penalties for not meeting the requirements, which include fines of up to 100 million rupiah (S$10,306), blacklisting the company's management or revoking licences, won't apply until 2018.