BSP imposes 10% minimum CAR on financial institutions

The Monetary Board has decided to impose a 10 percent minimum risk-based capital adequacy ratio (CAR) on investment houses and financing companies. Banking sources this move will align the capital adequacy of quasi-banks with the rest of the banking sector.

The guidelines were approved by the Bangko Sentral ng Pilipinas (BSP) last week, setting the 10 percent minimum CAR on financial institutions that were not previously covered by this safety mechanism.

At present, the BSP said quasi banks are required to maintain a minimum net worth to risk ratio of 10 percent, computed in accordance with the provisions of the General Banking Act.

BSP Deputy Governor Alberto V. Reyes said that although the new guidelines prescribed the same 10 percent minimum, the method of computing would be different.

"The new framework allows for finer distinction between relative risks of various asset categories," Reyes explained.

Under the new framework, Reyes said the qualifying capital would consist of Tier 1 or core capital and Tier 2 or supplementary capital, less deductions.

Like banks, the Tier 2 capital of quasi-banks is limited to 100 percent of their Tier 1 capital and would include their issuances of unsecured subordinated term debt subject to certain conditions.

Deductions include equity investments in subsidiaries and reciprocal investments in other enterprises that capture the multiple use of capital. Risk-weighted assets, on the other hand, comprise of both on- and off-balance sheet exposures weighted according to their relative risks.

Reyes said the risk weights would be applied to the book value of on-balance sheet assets and the credit equivalent amount of off-balance sheet exposures.

According to Reyes, the new guidelines would take effect on Jan. 1, 2004 in order to give quasi-banks to adjust to the new requirement.

He said the BSP would ask the Securities and Exchange Commission (SEC) to consider a similar requirement on investment houses without quasi-banking license.

Reyes said the BSP is also planning to eventually phase-in supplementary guidelines to also cover market risk exposures of quasi-banks in the near future.