ILAAP complements regulatory ratios such as LCR and NSFR with a more comprehensive risk-based internal approach. Its implementation is phased according to bank categories, aiming to ensure liquidity resilience under both normal and stress conditions. ILAAP emphasizes alignment between risk profile, business strategy, and strong governance. It also introduces new liquidity risk metrics, enhanced stress testing, and improved reporting requirements. The process strengthens regulatory oversight through periodic evaluation. Overall, ILAAP serves as a strategic instrument to maintain banking stability and sustainability.
The Financial Services Authority (Otoritas Jasa Keuangan, OJK) has released SEOJK No. 26/SEOJK.03/2025, which outlines the mandatory application of the Internal Liquidity Adequacy Assessment Process (ILAAP) for both commercial and sharia/Islamic banks. ILAAP represents an enhancement of the Pillar 2 framework, intended to ensure that a bank’s liquidity remains sufficient on an ongoing basis under both normal and stressful conditions, using an approach that aligns with the bank’s risk profile, business strategy, and level of business complexity.
ILAAP supplements ratio-based regulatory measures such as the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) by introducing an internal, forward-looking, and risk-based framework that encourages banks to conduct a comprehensive evaluation of their liquidity adequacy and the effectiveness of their liquidity risk management.
This regulation will be rolled out gradually. Banks categorized under Core Capital Groups (KBMI) 3 and KBMI 4, as well as Foreign Banks, will enter a trial phase in 2026 and move to full implementation in 2027. Banks in KBMI 1 and KBMI 2 will begin their trial phase in 2029, with effectiveness following one year later. Full implementation across all banks and all reporting requirements is expected to be achieved by 2031.
| 2025 | OJK Publications and Announcements OJK issued regulations related to ILAAP, SEOJK 26/SEOJK.03/2025. |
| 2026 | Phase 1a: Trial for KBMI 3, KBMI 4, and foreign banks For LCR reporting of significant currencies, funding profiles, and monitoring of the going concern period. |
| 2027 | Phase 1a: Go-live for KBMI 3, KBMI 4, and foreign banks LCR’s official reporting on significant currencies, funding profiles and viability monitoring. |
| 2028 | Phase 2a: Trial for KBMI 3, KBMI 4, and foreign banks For Intraday Liquidity Risk reporting. Phase 1b: Trial for KBMI 1 & KBMI 2 For LCR reporting of significant currencies, funding profiles, and monitoring of the going concern period. |
| 2029 | Phase 2a: Go-live for KBMI 3, KBMI 4, and foreign banks Official reporting of Intraday Liquidity Risk. Phase 1b: Trial for KBMI 1 & KBMI 2 LCR’s official reporting on significant currencies, funding profiles and viability monitoring. |
| 2030 | Phase 2b: Trial for KBMI 1 and KBMI 2 For Intraday Liquidity Risk reporting. |
| 2031 | Phase 2b: Go-live for KBMI 1 and KBMI 2 Official reporting of Intraday Liquidity Risk. |
| Fase 1 | LCR reporting of significant currencies, funding profile and going concern monitoring |
| Fase 2 | Intraday Liquidity Risk reporting |
Background and Reason
Liquidity risk management is a fundamental pillar for safeguarding the resilience and long-term viability of banking institutions. Inadequate liquidity can generate systemic risks and directly affect a bank’s ability to sustain its operations.
In this context, the ILAAP functions as a strategic tool rather than merely a reporting requirement. Through ILAAP, banks must assess their liquidity adequacy, as well as the effectiveness of their liquidity risk controls in a structured manner within a formal report, which subsequently becomes the basis for supervisory evaluation by the OJK.
ILAAP is intended to ensure that a bank’s liquidity management is aligned with its defined risk appetite and risk tolerance, while explicitly taking into account the impact of liquidity risk on the bank’s overall financial condition and resilience.
Scope of Implementation
All commercial and sharia/Islamic banks are obligated to implement the ILAAP in line with the prescribed implementation phases. This approach is proportional, with the design and level of detail of the ILAAP adjusted to the bank’s size, characteristics, and business complexity.
| Criteria | Description |
| Scope | Applies to all commercial banks (KBMI 1–4), including sharia/Islamic banks. |
| Risk-based Focus | A more robust risk-based approach with a clearer and more precise connection between liquidity risk measurement and risk appetite. Liquidity adequacy will be evaluated proportionately to each bank’s risk profile. |
| Governance | Enhancing internal governance, including clearer roles, responsibilities, and management accountability in overseeing liquidity risk. |
| Enhanced Reporting of Comprehensive Liquidity Risk Metrics | The introduction of four additional liquidity risk metrics alongside the existing LCR and NSFR, namely: LCR for significant currenciesintraday liquidity riskfunding profilesurvival period monitoring with behavioral model integration |
| Enhanced LCR and NSFR Reporting | The inclusion of both qualitative and quantitative assessments to complement the existing standard ratio reporting for the LCR and NSFR. |
| Stress Testing Liquidity | The implementation of liquidity stress testing that encompasses a broader set of scenarios, extending beyond the scope currently mandated under the LCR and NSFR. |
| The Role of Regulatory Oversight | Enhancing regulatory oversight of how banks measure and manage liquidity risk. |
An effective and comprehensive ILAAP is supported by a clear liquidity risk assessment and robust risk governance. This includes an efficient escalation mechanism and a limit system aligned with the bank’s risk strategy. This regulation emphasizes four key pillars of ILAAP:
| Governance and organizational structure that ensures the active role of the Board of Directors and Board of Commissioners | Adequacy of documented and consistent internal policies and procedures | Adequacy of liquidity risk management processes, including identification, measurement, monitoring and mitigation of liquidity risks | Independent internal review to ensure the quality and effectiveness of ILAAP implementation |
Together, these four pillars reinforce governance, strengthen risk culture, and enhance the quality of liquidity-related decision-making.
ILAAP and LCR-NSFR
Within the ILAAP framework, the LCR and NSFR are no longer viewed solely as compliance ratios to satisfy regulatory minimums. ILAAP broadens the function of these ratios by requiring banks to perform internal assessments of their adequacy, ensuring they are aligned with each bank’s specific risk profile, business model, and stress exposures.
Consistent with the expectations of the OJK, the ILAAP explicitly requires qualitative analysis of the LCR and NSFR by linking movements in these ratios to their key drivers, including funding concentration, the stability of funding sources, access to financial markets, and behavioral assumptions applied in liquidity calculations.
Furthermore, the ILAAP embeds liquidity metrics into the bank’s governance and management decision-making framework, positioning the LCR and NSFR as parameters of liquidity risk appetite rather than solely as regulatory compliance indicators.
Therefore, reliable, consistent, and traceable LCR and NSFR reporting serves as a fundamental basis for implementing the ILAAP in accordance with the OJK circular. Strong reporting provides a credible quantitative foundation for evaluating liquidity adequacy, supports stress testing and survival analysis, and offers assurance to the OJK that liquidity risk is being managed proactively and in line with the bank’s risk profile.
Key Regulatory Enhancements
As part of the implementation, OJK has introduced several new reporting requirements beyond the LCR and NSFR, including:
| Prepared Report | Reporting Frequency to OJK |
| ILAAP Qualitative Reporting | Semiannually |
| LCR for Significant Currencies | Monthly |
| Intraday Liquidity Risk | Monthly |
| Funding Profile Reporting | Monthly |
| Survival Period Monitoring | Quarterly |
Implication
The ILAAP will be assessed annually by OJK through the Liquidity Supervisory Review and Evaluation Process (LSREP), which forms part of the Supervisory Review and Evaluation Process (SREP). In this process, the OJK will:
- review and validate the quality and credibility of the ILAAP
- assess the effectiveness of liquidity risk governance and management
- evaluate liquidity adequacy and stress resilience
- identify shortcomings and determine necessary corrective actions
- apply additional supervisory measures where required
The quality of ILAAP implementation will be a key determinant in supervisors’ assessments of a bank’s risk profile and liquidity resilience.
