Regulators are confident banks can comfortably comply with stricter capitalization rules, which aim to insulate the economy from the collapse of any of the Philippines’ leading lenders.
The Bangko Sentral ng Pilipinas (BSP) said it had completed its official list of Philippine banks considered “too big to fail.” The BSP refused to identify the names of these domestic systemically important banks (D-SIB), but a report earlier this year said 14 lenders would be covered.
The new rules, which require major banks to put up more cash buffers for losses, aims to ensure that the industry is strong enough to withstand massive write offs.
“The higher bar for D-SIBs in terms of capital requirement and supervisory expectations serves to strengthen the system by lowering the probability of systemic bank failures,” BSP Governor Amando M. Tetangco Jr. said in a statement.
Banks are named D-SIBs based on their size, the extent of their dealings with other lenders and institutions, substitutability and market reliance, and the complexity of operations.
These D-SIBs are characterized as banks whose distress or disorderly failure would cause significant disruptions to the wider financial system and economy.
Depending on their classifications of D-SIBs, banks will be required to put up the capital equivalent to 1.5 to 2.5 percent of their risk-weighted assets. This capital requirement will be on top of the 10 percent capital adequacy ratio (CAR) that all universal and commercial banks already have to maintain to operate in the Philippines.
D-SIBs must also meet higher supervisory expectations. For example, in the annual submission of their Internal Capital Adequacy Assessment Process (ICAAP) document, D-SIBS must have in place acceptable recovery plans which will be carried out in the event of breaches in capital requirements.
The central bank chief said the banking system remains in a strong position and that the D-SIBs guidelines are “pro-active measures to sustain such strength.”
He added that the higher minimum CET1 threshold would not be disruptive since “our internal simulations affirm that a reasonable earnings retention program would be sufficient to bring the capital level of D-SIBs within the required threshold.”
The new rules on D-SIBs are in line with international rules introduced in the aftermath of the recent financial crisis, which was triggered by the collapse of major banks and mortgage houses in the US.