MANILA, Philippines--The Bangko Sentral ng Pilipinas (BSP) has instructed rural banks to prepare for an increase in their capitalization requirement by 2011, saying that this early, troubled institutions should already look for ways to raise the needed capital.

The increase in the capitalization requirement is in compliance with the Basel II accord, under which operational risks of banks must be included in the computation of risks to be covered.

Operational risks include disruptions caused by calamities and losses arising from fraud and systems failure. Currently, only credit risks, which involves potential losses due to default by borrowers, require capital cover.

Basel II accord is an improved regulatory framework agreed upon by central banks and other regulators. The objective of the accord is to strengthen banking and finance worldwide, enabling the sectors to withstand economic volatilities.

The BSP requires banks to maintain a capital adequacy ratio (CAR) of 10 percent, higher than the international standard of 8 percent. The BSP said it wanted the regulatory environment in the Philippines to be ahead of those of other countries.

To cover operational risks, rural banks will have to put up additional capital to meet the 10-percent minimum CAR requirement.

CAR is the proportion of capital to a bank’s assets exposed to risks.

Unlike universal and commercial banks, which are now required to cover their operational risks, rural banks have been given more leeway—they have until 2011 to increase their capital requirement.

But the Rural Bankers Association of the Philippines (RBAP) said the increase in capitalization requirement by 2011 could potentially threaten the viability of a few rural banks.

RBAP spokesperson Tomas Gomez IV earlier said that although most rural banks would have no problem raising the additional capital cover, some rural banks might not be able to cope with the new requirement.

On the average, rural banks have maintained CAR of 18 percent, much higher than the BSP’s 10-percent requirement.

Gomez said the industry’s average CAR could go down to 16 percent once the new capitalization requirement takes effect.