BSP Governor Amando M. Tetangco Jr.: Major initiative. INQUIRER FILE PHOTO
MANILA, Philippines–The central bank has announced a third major regulation change in two days, this time ordering banks deemed “too big to fail” to set aside more substantial capital buffers for potential losses.
Rules on domestic systemically important banks (D-SIBs) are in line with recent Basel III rules being put in place worldwide to avoid a repeat of the global financial meltdown in 2008.
“The new regulation is a major initiative designed to ensure that our banking industry further builds upon the strength that it has already achieved,” Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said in a statement.
By forcing large banks to set aside higher levels of capital, regulators hope to remove the “moral hazard” of government bailouts for lenders that take advantage of loose regulations to take excessive risks, which lead to a buildup of toxic assets.
Earlier this week, the BSP announced other rule changes that affect the country’s banking sector. The first was a rule that linked the size of a bank’s branch network to the minimum amount of capital it would need to put up.
The second major rule was a shift in the way banks should treat borrowers. A premium was put on borrowers’ income streams, which represented a shift from the current practice of focusing on collateral.
Under the new rules, the important banks would be classified into various buckets. Those at the top would have to set aside an extra 3.5 percentage points of common tier-1 capital. This would be on top of the minimum 6 percent tier 1 capital already required of major banks. These banks are also required to set aside another 2.5 percentage points of capital as a conservation buffer.
Banks’ capital levels, measured relative to the amount of risk-weighted assets they hold, are required by regulators. Capital serves as buffer for potential losses. Hence, the size of a bank’s loan portfolio is restricted by the amount of capital it has.
Local lenders that fall below the required capital would be subject to restrictions over the distribution of its profits to shareholders.
“Limiting the distribution of profits is the way for these banks to build up their capital position by re-channeling their profits,” Tetangco said.
The string of new rules approved by the BSP seeks to further strengthen the banking sector, one of the pillars of the domestic economy.
Local banks had total assets of P10.27 trillion at the end of June, BSP data showed. Gross non-performing loans, meanwhile, totaled at just P139.80 billion.