BSP imposes stricter capitalization rules on foreign bank branches

Local branches of foreign banks will be given until 2015 to comply with stiffer capitalization rules that local lenders will have to adhere to by January next year.

The Bangko Sentral ng Pilipinas on Monday announced the approval of stricter capitalization requirements for foreign bank branches in the country, leveling the playing field with the rest of the industry.

“This initiative strengthens foreign bank branches in the Philippines because they will have their capital onshore when they take on onshore risks,” BSP Governor Amando M. Tetangco Jr. said.

At present, local offices of foreign banks are required to put up capital that is permanently assigned for their operations in the country.

On top of this, banks are also allowed to consider advances from their parent firms part of their Tier-1 capital, even though the advances have to be paid back later and should therefore be treated as debt.

BSP Deputy Governor Nestor A. Espenilla Jr. earlier said these advances were riskier forms of capital since there was no assurance that the money would stay in the Philippines.

Under the new rules, these advances would no longer be treated as the equivalent of capital in a bank. Instead, regulator said only permanently assigned capital (PAC) would be counted as tier-1 capital.

These new rules will force foreign banks to infuse more cash into their offices in the Philippines if they wish to continue operating in the country.

The BSP said foreign banks would have to comply with the Basel 3 rules by January 2015. However, these banks will have to submit a “capital build-up plan” by April next year. This should outline how a bank plans to comply with the new rules, as well as a list of required approvals from their headquarters abroad.

“The new policy is consistent with the intention of the reforms under Basel III to classify debt instruments as Tier-2 capital,” the BSP said.

This means foreign bank branches must meet all prescribed minimum capital ratios for the banking industry. Under the Basel 3 rules that take effect for local banks next year, lenders must maintain a Tier-1 capital adequacy (CAR) ratio of 7.5 percent of their total loan portfolios.