BSP tightens capital rules to protect small banks from shocks
The Bangko Sentral ng Pilipinas (BSP) on Wednesday announced an improved policy for measuring the capital levels for some of the country’s smaller bank categories in a bid to improve the resilience of these financial institutions against market shocks.
In a press statement, the central bank 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.
“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 comprised 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 central bank said.
Meanwhile, the 2.5-percent capital conservation buffer requirement is also introduced in the revised framework. 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, adding that when certain levels of common equity capital were breached, the bank concerned would 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 for smooth transition.
