BSP prepares for implementation of capital conservation buffer rule

The Bangko Sentral ng Pilipinas said banks that would fail to meet the “capital conservation buffer” requirement, which will be imposed starting January 2014, would be prohibited from paying dividends and from distributing discretionary bonuses to employees.

Non-compliant banks will also be prohibited from buying back their shares.

The capital conservation-buffer requirement was set at 2.5 percent of a bank’s assets, measured using risk weights. Under rules, the buffer must be composed of common equities.

The imposition of this requirement is in line with Basel 3, the updated international standards on bank regulation, which is meant to help prevent financial crises.

“The purpose of this buffer is to ensure that banks can maintain capital levels throughout a significant downturn and that they have less discretion to deplete their capital buffers,” the BSP said in an explanatory paper on new capitalization rules to be imposed in 2014.  The paper has been distributed to banks and posted on the central bank’s website.

According to the BSP, the capital conservation buffer will further help make banks resilient from shocks. Shocks may include a global economic downturn that could drag incomes that may cause an increase in loan defaults.

Besides the imposition of the capital conservation-buffer requirement, another component of Basel 3 that the BSP is set to implement next year is the tighter capital adequacy ratio (CAR) requirement, which currently stands at 10 percent of risk-weighted assets.

By 2014, the CAR requirement will still be 10 percent but this must be composed more of higher quality capital. In particular, an amount equivalent to 6 percentage points of the 10 percent CAR requirement must be composed of common equity.