BSP mulls capital notes for banks

Monetary authorities are studying the proposal of the Bankers Association of the Philippines (BAP) to use so-called capital notes as compliance to the required capitalization of banks.

"We are still evaluating it. We are still looking at it," BSP Deputy Governor Alberto Reyes said, even as he acknowledged that this is an accepted practice in international financial markets.

"It is allowed under international standards and rules," Reyes said, when asked if the proposal warrants BSP's approval. However, he said the use of capital notes as compliance to the capital requirement of banks would be subject to certain guidelines. "There should be terms such as it should be long-term and subordinated," Reyes said.

The BAP earlier submitted a position paper to the BSP to allow its member banks to issue capital notes as part of their compliance to the required minimum capital.

Based on the BAP paper, a capital note is a debenture issued by a bank or bank holding company that qualifies as unimpaired bank capital.

Capital notes are unsecured liabilities that have original maturities of at least seven years, are non-callable before the maturity date, and have a mandatory conversion clause requiring the issuer to exchange the notes for common stock at a future date at a specify price.

Since the Asian financial crisis in 1997, many local banks have had difficulty meeting the required minimum capital imposed by the BSP.

The BAP said that the Philippine banking industry faces the inevitable challenge of integrating itself with an increasingly internationalized economy.

It noted that a number of Asian monetary authorities have revised (bank) capital guidelines that more or less correspond to the BIS (Bank of International Settlements) standard.

According to BAP, this alternative compliance to the capital requirement is necessary since they do not intend to ask the monetary authorities to extend or defer the implementation of the capital hike.

By the end of this year, expanded commercial or universal banks are required to have a minimum capital of P5.4 billion from P4.95 billion in end-1999, while commercial banks should have P2.8-billion capital from P2.8 billion last year.

Thrift banks operating in Metro Manila are required to put up a capital of P400 million by the end of this year from P325 million in end-1999.

Banks which fail or cannot meet minimum capital requirements will have to either merge or downgrade their status.