New stress tests ordered for banks
Talks of a real estate bubble forming in the country have once again been dismissed, but this hasn’t stopped regulators from brandishing a giant pin meant to pop the balloon and stop prices from inflating beyond safe levels.
The Bangko Sentral ng Pilipinas (BSP) this week announced a fresh wave of stress tests where banks must prove that their books would be able to handle massive losses should the real estate loans in their portfolios turn toxic.
Regulators said the stress tests were pre-emptive measures “to ensure the banking industry’s continuous healthy exposure to real estate development.”
“The Monetary Board is implementing the macro-prudential measure while cognizant of the social agenda of providing shelter as a basic need,” the BSP said. “It also recognizes the continuing growth of the real estate industry in line with national demographic factors.”
Stress tests will be conducted under the new prudential guideline to determine whether the capital level of a bank is sufficient to absorb the credit risk to real estate, the BSP said.
“We want to know the effects in interest rates and other factors that impact the real estate sector,” BSP Governor Amando M. Tetangco Jr. told reporters last month as he hinted at the new rules.
These tests will involve simulations to how losses from real estate loans would affect individual banks’ books. If, after these simulations are done, the BSP sees that a bank’s capital adequacy ratio (CAR) would fall below the minimum 10 percent required by regulators, that institution would be asked to formally explain.
If the BSP finds this explanation insufficient, the bank would be told to submit an “action plan” that outlines how that lender plans to address its deficiencies.
A bank’s CAR measures the amount of a bank’s capital, in the form of equity and loss-absorbing debt securities, relative to its risky assets. CAR is an indication of a bank’s capacity to absorb losses.
“The Monetary Board believes that this is an opportune time to introduce such measure so that banks will be appropriately guided by policy direction,” the BSP said.
Prudential measures by the BSP aiming to keep the real estate sector in check were partly blamed for the slowdown in economic growth in the first quarter. The Philippine Statistics Authority (PSA) said property firms were less willing to finance the construction of new homes and buildings due to the stricter regulatory scrutiny, resulting in a slowdown in private construction.
At the end of last year, the banking sector’s exposure to the historically volatile real estate sector rose to the equivalent of 21.8 percent of their loan portfolios from 21.7 percent in June 2013.