The Bangko Sentral ng Pilipinas has issued stricter capitalization guidelines that banks must comply with starting January 2014 to meet Basel III standards.
Basel III refers to the updated international bank regulations aimed at preventing a repeat of the 2008 financial crisis, from which the United States and Europe are still recovering.
Currently, banks are required to set aside capital equivalent to at least 10 percent of their risk-exposed assets, which are measured using risk weights.
Under the new guidelines, the bulk, or 7.5 percentage points of the 10 percent, must be composed of Tier 1 capital, which includes common equity and other liquid assets.
In addition, at least 6 of the 7.5 percentage points must be common equity.
Tier 1 capital is considered of better quality than, say, capital obtained from borrowings or issuance of bonds.
This is because borrowings or bond-sale proceeds translate to indebtedness of a bank.
The guidelines also state that on top of the 10-percent capital, banks must keep a “conservation buffer” equivalent to 2.5 percent of the risk-weighted assets. This buffer must be composed entirely of equity.
The conservation buffer is meant as an additional security to help banks weather crises, the central bank said.
BSP Deputy Governor Nestor Espenilla Jr. told reporters that the Philippines will be implementing the tighter capital requirements ahead of advanced economies.
Countries are supposed to fully implement Basel III by 2018.
However, Espenilla said, some emerging economies like the Philippines have decided to implement the provisions of Basel III much earlier than 2018.
He said banks in the Philippines do not need a longer transition period because the capital of most of them already meets the standards of Basel III.
As of end-March, the average capital adequacy ratio of banks was at 16.85 percent and that 14 percentage points are accounted for by Tier 1 capital.
BSP Governor Amando Tetangco Jr. said meeting the provisions of Basel 3 will help ensure that the stability of the Philippine banking system will be maintained.