Indonesia: Financial Sector Assessment Program-Financial System Stability Assessment

This paper presents financial sector stability assessment as part of Financial Sector Assessment Program in Indonesia. The financial system appears to be broadly resilient, has strong capital and liquidity buffers but remains relatively small and dominated by banks, especially few state-owned banks. Household and corporate indebtedness and public debt are low. The increase in banks’ holdings of government bonds and loans to state-owned enterprises has tightened the sovereign-bank nexus, but banks appear to be resilient. Credit risk tends to be higher in pandemic-hit industries and highly leveraged corporations. The mission recommends strengthening loan quality recognition by banks and risk assessment of small banks. Corporate and banks foreign exchange (FX) liquidity analysis could be integrated to identify systemic FX risks which can inform the setting of micro- and macroprudential policy instruments. Strengthening independence of the supervisor and providing clarity on primary supervisory objectives is important. Indonesia’s resolution framework should be more closely aligned to the FSB Key Attributes, including regarding the bail-in tool, and should cover financial conglomerates in the framework. Authorities should not delay resolution of weak banks by providing liquidity assistance from the deposit insurance fund.