The Bangko Sentral ng Pilipinas (BSP) will soon allow local banks to set aside less money to cover for possible losses from government securities, following the improvement of the country’s credit standing in the international community.
The revised rules on the computation of the risk-weight of certain securities this week show that the BSP now considers dollar-denominated government debt paper, also known as ROP (Republic of the Philippines) bonds, as safer investments than they were before.
The change in “the corresponding risk weight/capital charge of foreign currency-denominated exposure to the national government of universal and commercial banks (follows) the recent sovereign credit upgrades,” the BSP said.
BSP Deputy Governor Nestor Espenilla Jr., in a text message, said capital charges on ROPs were reduced because “the Philippines is now investment grade.”
Both Fitch Ratings and Standard & Poor’s, two of the three major international rating agencies, upgraded the country to “investment grade” earlier this year, citing the Philippines’ better fiscal position that improved its ability to repay loans.
The BSP’s new rules state that the credit risk weight of ROPs would be reduced to 50 percent from 100 percent. The capital charge for “specific market risk,” or interest rate risk, would also be reduced to a range of 0.25 percent to 1.6 percent from the current charge of 8 percent.
The new computations will take effect on June 30, the BSP said.
Under local and international rules, banks have to maintain a certain level of capital, both in the forms of equity and debt, for every peso that they lend to the public, companies, or the government through the purchase of state-issued IOUs.
Different kinds of loans mean different amounts of capital to be set aside. This is done to ensure that banks will not become too aggressive in lending to the point of endangering the funds they hold for depositors.
The BSP’s latest report on the average capital adequacy ratio of big banks showed that the industry maintained an average of 17.28 percent at the end of last year. This was well above the minimum of 10 percent prescribed by the BSP and the global standard of 8 percent.
“A robust CAR position supports financial stability because it provides individual banks and the industry with an adequate buffer against risks and unexpected losses,” the BSP said.