MANILA, Philippines–Banks could be allowed to set aside even less money to cover their holdings of government IOUs if the Philippines were to receive another credit upgrade from a second major ratings firm.
According to the Bangko Sentral ng Pilipinas (BSP), it will consider another reduction in the risk weight of government securities, once a consensus is reached on the country’s credit rating.
Standard & Poor’s (S&P) last May upgraded the Philippines’ sovereign debt rating to two notches above junk status—the highest ever for the country.
Moody’s Investor Service and Fitch Ratings have the Philippines at a notch below the S&P score.
“[The rating] is not yet unanimous. You still have the two other credit raters who are saying the Philippines is still at the minimum investment grade,” BSP Deputy Governor Diwa C. Guinigundo said.
Under local and international rules, banks have to maintain a certain level of capital, both in the forms of equity and debt, for every peso that they lend to the public, companies, or the government through the purchase of state-issued IOUs.
Different kinds of loans mean different amounts of capital to be set aside. This is done to ensure that banks will not become too aggressive in lending to the point of endangering the funds they hold for depositors.
By lowering the risk weight of certain securities—in this case ROPs—banks may get to set aside less money to cover their exposure. This will enable banks to lend more to certain sectors.
In June last year, the BSP announced that the credit risk weight of dollar-denominated government bonds known as ROPs (Republic of the Philippines) would be reduced to 50 percent from 100 percent.
The capital charge for “specific market risk,” or interest rate risk, was also reduced to a range of 0.25 percent to 1.6 percent from the previous charge of 8 percent.
The revised rules on the computation of the risk-weight of certain securities came about after the country secured an investment grade last year.