Key Indicators, Reciprocity And Regulation Of The Countercyclical Capital Buffer In Indonesia

Bambang Pramono (), Januar Hafidz (), Justina Adamanti (), Maulana H. Muhajir () and Muhammad Sahirul Alim ()
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Bambang Pramono: Bank Indonesia
Januar Hafidz: Bank Indonesia
Justina Adamanti: Bank Indonesia
Maulana H. Muhajir: Bank Indonesia
Muhammad Sahirul Alim: Bank Indonesia

No WP/14/2015, Working Papers from Bank Indonesia

Abstract: The Countercyclical Capital Buffer (CCB) is one of the macroprudential policy instruments that is needed in Indonesia. In December 2010, the Basel Committee on Banking Supervision (BCBS) released guidelines for the national authorities in determining the size of the CCB. BCBS recommended the use of the ratio of broad credit to GDP gap as the key indicator in determining the size of the CCB rate and the period the CCB is effective with the lower limit (L)and the upper limit (H) standing at 2% and 10% respectively. However, the ratio of broad credit to GDP gap indicator is not appropriate for Indonesia because it is not able to identify excessive credit growth before a crisis occurs. Because of that, several other indicators are tested in this paper to determine which indicator is the most suitable given the state of Indonesia’s banking conditions and economy. The test results show that the banks’ ratio of broad credit to GDP gap is the most appropriate indicator with L and H of 3% and 6%, respectively. In adopting CCB policy, the matter of jurisdictional reciprocity warrants attention considering there are banks which operate internationally. The matter of reciprocity is closely related to how the CCB policy is implemented for branch offices of overseas banks (KCBA) and branch offices of domestic banks abroad (KCLN). Furthermore, because CCB policy will be implemented in Indonesia, a regulation needs to be devised concerning the requirement to form CCB as a reference for Bank Indonesia, the banking sector, and other stakeholders.

Keywords: Countercyclical Capital Buffer; Procyclicality; Macroprudential; Gap Credit to GDP (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2015
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