Philippine banks said to outdo global counterparts

Philippine banks have performed better than their foreign counterparts in terms of strict compliance with the requirements of Basel 3, the latest set of internationally accepted standards for bank regulation, the Bangko Sentral ng Pilipinas (BSP) claimed.

According to the BSP, while banks in more advanced economies need longer time to prepare for the adoption of Basel 3, which will be implemented worldwide on a staggered basis over the medium term, Philippine banks have actually complied with the new set of rules.

BSP Governor Amando Tetangco Jr. attributed this development to the resiliency of banks in the Philippines, which emerged unscathed from the global financial crisis of 2007 and 2008, unlike other institutions in industrialized nations.

“In contrast [to banks in the United States and Europe], Philippine banks expanded their balance sheets throughout the 2007-2008 crisis and continue to expand today,” Tetangco explained.

Early compliance

This is the reason why the Philippines can afford to fully comply with the provisions of Basel 3—implementing in fact a tighter version of the requirements—much earlier than those of more advanced economies, the BSP chief said.

The central bank announced earlier this month that all universal and commercial banks in the country would be fully compliant with the Basel 3 requirements by January 2014. The schedule is much earlier than the 2019

prescribed by the Bank for International Settlements (BIS) and which will be observed by advanced economies.

“At a strategic level, we [BSP] believe that setting the implementation date earlier than the one set by the BIS will eliminate the uncertainties that come with a very long transition period,” Tetangco said.

He added that the longer timeline prescribed by the BIS was meant to accommodate banks in advanced economies still trying to recuperate from the recent crisis.

Under the stricter standards to be implemented by the BSP in 2014, the minimum capital adequacy ratio required of banks will be raised from 10 to 12.5 percent. This is higher than the 8 percent prescribed by

Basel 3.

Also, the capital must be composed more of tier 1—which is largely composed of common equity and is of a higher quality than other types of capital, such as those raised from a bond sale.

In particular, tier 1 capital requirement in the Philippines has been set at 7.5 percent, which is actually higher than the 4.5 percent prescribed under Basel 3.

Common equity is preferred over capital raised from bonds because the former does not add to a bank’s debt.

The international financial community has come up with tighter capitalization requirements in response to the crisis that affected most banks in advanced economies. This development was partly blamed on weak regulation and lax credit standards of most Western banks.