New BSP rule discourages banks from becoming ‘too big to fail’

Philippine banks that become too large—large enough to affect the rest of the financial system, in case they run into trouble—will be required to set aside more capital to guard against market volatility, the central bank said.

In a statement released last weekend, the Bangko Sentral ng Pilipinas also said that its newly approved framework for dealing with domestic systemically important banks would have provisions to discourage banks from growing into the so-called too-big-to-fail category.

Apart from requiring these giant financial institutions to have higher capital, they will be “subject to more intensive supervisory approach and will be required to adopt a concrete and acceptable recovery plan that will address the risks they pose to the financial system and the real economy,” the BSP said.

Depending on the degree of systemic importance, identified systemically important banks will be categorized into different higher loss absorbency buckets and will be required to increase their minimum common equity tier 1 capital by 1.5 percent to 2.5 percent of total risk-weighted assets, it said.

The requirement to have higher loss absorbency or additional capital in the form of pure equity aims to bolster the resilience of these systemically important banks.

“This is on top of the existing [minimum equity] levels, capital conservation buffer, and countercyclical capital buffer required from all universal and commercial banks, as well as their subsidiary banks and quasi-banks,” the regulator said.

Large banks classified as posing the highest systemic risk will have a uniform 1.5 percent higher loss absorbency requirement, while those slotted under the less riskier category will have a differentiated requirement (up to a maximum of 2 percent).

A third category with loss absorbency requirement of 2.5 percent will be maintained “to provide incentives for banks to avoid becoming more systemically important,” the regulator said, adding that failure to meet these minimum requirements will be penalized with restrictions on the bank shareholders’ dividend policies.

The BSP said the new rules were approved by its policy-making Monetary Board in line with international standards that aimed to safeguard the stability of the financial system, in line with regulatory changes around the world.

The enhanced framework will cover revisions in the differential weights of categories or indicators and the composition of indicators, including the adoption of threshold level; and calibration of the level of additional capital requirement. These enhancements will be applied on a consolidated basis to all universal and commercial banks as well as their subsidiary banks and quasi-banks, and branches of foreign banks.

Under the revised framework, a bank’s systemic importance is assessed based on pre-defined indicators for size, interconnectedness, substitutability and complexity. Among the four categories, size and interconnectedness bear greater weight as these factors are more critical measures in determining a bank’s systemic importance in the Philippines, taking into consideration the simple structure of the Philippine financial system.

Banks identified systemically important will be individually informed of their designation with details as to the category they belong to and the individual score for each indicator, the BSP added.