Local banks will be required to maintain capitalization requirements well above even the strictest international standards under the new Basel III regulations, which regulators want partly implemented by next year.
The Bangko Sentral ng Pilipinas (BSP) last week bared details of its version of the latest international banking agreement, which was developed in response to the global financial crisis of 2008.
“We want to preserve the principles of the Basel Accord, even though our numbers might be higher,” BSP Assistant Governor Johnny Noe Ravalo said at a recent press conference.
The first and most crucial element of the Basel III accord, which the BSP plans to implement by January, will be rules on capital.
At the moment, local banks are already required to maintain a capital adequacy ratio (CAR) of 10 percent, higher than the international standard of 8 percent under previous Basel II rules. A bank’s CAR represents its buffer for losses in case its risky assets have to be written off. This is a measure of a bank’s ability to absorb unexpected losses that may be a result of macroeconomic issues or a sudden rise in loan defaults.
BSP Governor Amando M. Tetangco Jr. in a recent speech to banking industry players, said the Philippines may be implementing Basel III rules ahead of the international schedule of 2019, but the country is already behind regional peers like Australia and New Zealand, which implemented them at the start of 2013.
Under the new rules, the BSP said it the minimum 10-percent CAR requirement would be retained, but the share of common equity in the CAR would be increased.
The BSP said it would require banks to increase tier 1 capital to at least 6 percent of their total CAR, up from the 5-percent minimum under Basel II rules. Tier 1 capital is made up mainly of actual shareholders’ equity in banks, manifested through common shares. On top of the required 6 percent, local banks would also be required to set aside a 2.5 percent “capital conservation buffer,” a new component that was absent from existing rule.