BSP tightens rules on capital to shield small banks from market shocks

The Bangko Sentral ng Pilipinas (BSP) on Wednesday (Feb. 26) announced an improved policy for measuring the capital levels of some of the country’s smaller banks in a bid to improve the resilience of these financial institutions against market shocks.

In a press statement, the BSP said its Monetary Board approved the amendments to the risk-based capital adequacy framework for stand-alone thrift, rural and cooperative banks to further enhance the quality of capital of covered banks.

“This reinforces the importance of maintaining sufficient level of common equity which could absorb losses on an ongoing basis,” the BSP said.

The enhanced capital standards provide minimum capital ratios of 6 percent Common Equity Tier 1 ratio and 7.5 percent Tier 1 ratio.

This is in addition to the existing minimum capital adequacy ratio of 10 percent.

Tier 1 capital is largely composed of conventional equity elements such as common shares, additional paid-in capital, retained earnings, and undivided profits.

The remaining component – called Additional Tier 1 capital – is mostly made up of eligible perpetual capital instruments.

“Since the composition of qualifying capital of covered banks under the current framework are already in the form of common equity, no significant change is expected resulting from the new capital categories,” the BSP said.

The BSP also introduced in the revised framework the 2.5 percent capital conservation buffer requirement.

This buffer is in the form of common equity capital and is computed in excess of the 6 percent common equity ratio.

“This requirement ensures that covered banks have capital buffers which can be drawn as losses are incurred,” the BSP said.

It added that when certain levels of common equity capital are breached, the bank concerned will be restricted from distributing earnings like dividends in order to build its capital buffers.

The BSP provides an observation period until Dec. 31, 2021 to allow the smooth transition to the amended capital requirements.

During this period, covered banks are required to submit parallel capital adequacy ratio reports using the existing and new frameworks.

“The enhanced capital standard is aimed at promoting the safety and soundness of individual banks and the banking system,” the central bank said.

“The modifications to the risk-based capital adequacy framework for stand-alone thrift, rural and cooperative banks largely conform with the Basel reforms,” it added.

Edited by TSB