MANILA, Philippines–Local banks have enough buffers to weather massive loan defaults, which will help ensure the economy stays stable in the event a major crisis takes place, however unlikely.
Recent simulations show the banking industry, as a whole, have enough capital to withstand “extreme but plausible” bouts of stress that may affect their balance sheets, Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said.
The central bank’s stress tests were designed to mimic past conditions, such as the Asian Financial crisis in the late 1990s, or future bouts of stress that may arise due to conditions overseas.
Tetangco said the recent stress tests indicated that banks, with their current capital buffers, should be able to withstand significant hikes in interest rates abroad and a sharp depreciation in the peso, which could affect the ability of borrowers to make payments.
Banks also have enough buffers to absorb massive defaults in their real estate portfolios, he added.
“They remain above the minimum capital requirement,” Tetangco told reporters on Tuesday.
He said different banks passed these tests in varying degrees: some got through comfortably, while others emerged near the threshold.
But Tetangco stressed that none failed the tests that were conducted using 2014 data.
“There’s a continuing regulatory discussion and consultation between the BSP and the banks,” he said.
Stress tests are part of the BSP’s continuing effort to ensure the stability of the financial system. These tests are done by stimulating the effects of losses that eat into banks’ capital buffers. After these effects have been considered, banks must still be able to have enough capital to meet minimum requirements.
Under the newest type of stress test launched by the central bank, even if 25 percent of a bank’s real estate exposure has been written off, the bank must still be able to maintain a common equity tier 1 capital ratio of at least 6 percent. Its total capital adequacy ratio (CAR) must also stay above the required minimum of 10 percent.
A bank’s capital serves as buffer that absorbs losses from risk-weighted assets that are written off. CAR refers to the level of a bank’s capital relative to its assets. This is made up of two types of capital: tier 1, which refers to common equity of shareholders; and tier 2, which are debt securities that absorb part of the losses in case a bank is ordered shut and liquidated.