BSP orders risk-variable capital buffers for banks
Philippine banks will soon be able to free up previously tied down capital to help them earn more during periods of stress while having to augment equity during good times when funds are aplenty, thanks to a new reform measure pushed by Bangko Sentral ng Pilipinas (BSP) Governor Nestor Espenilla Jr.
In a statement, the central bank said its Monetary Board approved the local adoption of a countercyclical capital buffer (CCyB) scheme for universal and commercial banks and their subsidiary banks and quasi-banks.
The CCyB will be complied with by the banks using their Common Equity Tier 1 (CET1) capital.
“During periods of stress, the Monetary Board can lower the countercyclical capital buffer requirement, effectively providing the affected banks with more risk capital to deploy,” the BSP said, noting this variable level of capital would be implemented using so-called tier one capital, or the funds put into the institution by common shareholders.
Conversely, during periods of continuing expansion, the capital buffer may be raised which has the effect of setting aside capital that can be used if difficult times ensue, the central bank explained.
Espenilla noted this variable capital buffer “expands [the central bank’s] toolkit for systemic risk management and is specifically designed to provide a steadying hand to counter the common occurrence of boom-and-bust periods within the financial cycle.”
This countercyclical capital buffer is set initially at a level of zero percent, in line with global practice.
The move also indicates that the Monetary Board does not see the ongoing buildup of credit as an imminent risk that would otherwise require an increase in the capital position of banks.
The buffer, however, will be regularly reviewed by the BSP, and banks will be given a lead time of 12 months in the event that the capital buffer is raised. However, when the buffer is reduced, it takes effect immediately.
“The countercyclical capital buffer is part of our macroprudential measures that can help guide the path of future credit growth but is flexible enough to potentially provide immediate effects to address market tightness. This is why it is important to have this framework in place,” Espenilla said.
The adoption of the countercyclical buffer reflects the efforts of the BSP to continuously monitor and mitigate the buildup of systemic risks and it is in line with the policy objective of pursuing financial stability.
