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Capital requirements on banks raised

/ 02:15 AM October 21, 2014

A new rule that would make it more expensive for banks to expand their branch networks has been approved by the Philippine central bank.

The move is in line with efforts to preserve the strength of the financial system.

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The new rule, announced officially by the Bangko Sentral ng Pilipinas on Monday, complements the recent lifting of restrictions on the physical expansion of banks in certain saturated locations. This also follows the imposition of higher risk-based capitalization requirements on banks at the start of the year.

In a statement, the BSP said the new rule that imposed higher capitalization requirement on banks based on the size of their networks would ensure the financial system’s stability amid increasing local and foreign competition, growing asset portfolios, and increasing complexity of operations.

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“The Monetary Board adjusted the level of the required minimum capital to ensure that banks stand on a strong capital base to support a threshold scale of operations to operate viably,” the BSP statement read.

The banks’ minimum capital requirements—in absolute terms—have not been adjusted since 1999, the central bank said.

Since that time, the banking industry has grown five-fold. The new rule is merely an attempt by regulators to keep up.

This is the latest of a string of recent major reforms implemented by local regulators. At the start of the year, Basel III rules were implemented, requiring banks to put up more capital based on the size of their loan portfolios. This was done to penalize excessive risk-taking.

A legislation that will pave the way for the entry of more foreign banks in the country was also approved this year. This is forcing local players to either team up or compete with deep-pocketed lenders from overseas.

Under the new rule, which takes effect next month, universal banks with more than 100 branches would need to have at least P20 billion in capital. Commercial banks with more than 100 branches would need P15 billion. Under the old rule, universal banks needed only P4.95 billion in capital, while commercial banks needed just P2.40 billion.

Less capital is needed for banks with fewer branches.

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For thrift banks with head offices in Metro Manila, having more than 50 branches means a bank would need at least P2 billion in capital. Those based outside Metro Manila need only P800 million for their 50 branches.

Under the old rule, the capital requirements for thrift banks were based solely on the location of their head offices. Those in Metro Manila needed P1 billion; in Cebu and Davao, P500 million, and other areas, P250 million.

A similar structure was followed for rural and cooperative banks. Metro Manila-based rural banks with more than 50 branches need P200 million in capital. Those with head offices in 1st to 3rd-class municipalities and with more than 50 branches would need P80 million, while those in 4th to 6th-class municipalities with 50 branches would need P40 million.

As with universal and commercial banks, having fewer branches means less capital would be needed.

Banks will be given five years to comply with the new rules. Those that will not be able to meet the requirement immediately will be required to submit their capital build-up plans. Banks that will fail to come up with acceptable capital build-up plans will be penalized with the “curtailment of future expansion plans,” the BSP said. Paolo G. Montecillo

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