The capitalization requirements for local banks may be increased to ensure the continued strength of the local financial sector, which has grown exponentially since the minimum was last revised.
The Bangko Sentral ng Pilipinas (BSP) on Thursday said there was an on-going industry-wide review on the minimum amount of capital that banks have to put up to be allowed to conduct their businesses.
“The last time this was increased was 14 years ago,” BSP Assistant Governor Johnny Noe Ravalo said. “Everything is on the table in terms of our review right now,” Ravalo said.
Under the manual of regulations for banks, universal banks are required to have a minimum paid up capital stock of P5.4 billion. For commercial banks, the amount is P2.8 billion.
Speaking at a forum conducted by Punongbayan & Araullo (P&A) on banking on Thursday, Ravalo said the last time banks were told to have higher capital was in 1999. Since then, banks’ balance sheets have grown more than five-fold.
Ravalo said hiking the minimum capital requirement would better reflect the size of the banking industry, given its importance to the local economy.
“At this point, we don’t know what changes are necessary and the timing of these reforms,” Ravalo said.
He stressed that the BSP would ensure that these changes would be introduced gradually to give local banks time to make adjustments.
“Not only do we want to trickle these reforms. We want to make sure that the industry would not be surprised,” he said.
Increasing the minimum capital imposed on banks is being considered given the scheduled implementation of Basel 3 capitalization requirements for local banks by the start of next year.
Under Basel 3 rules, the banks’ capital adequacy ratios (CAR) will have to have a higher proportion of tier 1 capital. A bank’s CAR is the ratio of its capital versus risk-weighted assets. A bank’s CAR serves as a buffer for losses from write-offs.
In the meantime, senior bank executives expressed reservation over the implementation of Basel 3 rules which, they said, would lead to higher borrowing costs to the public.
“We support the objectives and principles of Basel 3. Our concern is the degree and pace of implementation that the regulators want,” said Nestor Tan, president and CEO of BDO Unibank, the country’s largest lender.
Tan, speaking at the same P&A forum, said banks’ profits would be hit due to the need to put up more capital as lending portfolios grow. To compensate for the thinner profit margins, banks may also resort to riskier lending practices, which would undermine the integrity of the industry.
The Basel 3 rules on capital will be implemented next January, ahead of the internationally-agreed deadline of 2019. The BSP’s version of Basel 3 also requires more capital from local banks than the global benchmarks.
In a separate comment, Eastwest Bank Corp. president and CEO Antonio Moncupa Jr. said Basel 3 rules would also lead to a less-inclusive banking sector since banks would prefer to lend to clients that were more likely to pay.
As a result, small businesses and low-income households may be marginalized, Moncupa said.