Higher capital eyed for banks engaged in risky ventures

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) may soon require banks engaged in risky investments to maintain a higher capital to protect their depositors, its top official said.

BSP Governor Amando M. Tetangco Jr. said banks with higher risk exposures, or those engaged in more aggressive activities such as derivatives trade, may need to have higher capital adequacy ratios. This means that the ratios should be relative to the level of risks their businesses would have.

“Maybe these banks should be required to have higher capital adequacy ratios,” he told reporters.

A bank’s capital adequacy ratio measures its capital in relation to the risks it takes. Monetary authorities use this ratio to measure the health of the banking system.

According to latest data from the BSP, the banking industry’s capital adequacy ratio is above the minimum requirement of 10 percent and significantly better than the international standard ratio of eight percent as of end-June last year.

As of end-June, the industry ratio on a solo basis, which includes banking operations here and abroad, stood at 14.81 percent. On a consolidated basis, which includes banks’ subsidiaries, the ratio stood at 15.68 percent. The ratios were 0.25 and 0.38 percentage point higher, respectively, than the figures at the end of March, latest data from the BSP also showed.

The BSP’s review of the capital adequacy requirements of banks is being done alongside similar reviews initiated by most central banks around the world following the 2008 global financial crisis which started in the United States but gripped much of the world, including the Philippines.

In the Philippines, there are six foreign banks that have derivative licenses or authority to engage in structure and sophisticated products including swaps and options. These banks are Deutschebank, Standard Chartered Bank, ANZ Banking Group, HSBC, ING Bank and JP Morgan Chase.

Among the locals, Metropolitan Bank and Trust Co, Bank of the Philippine Islands and Security Bank have derivative licenses.

According to the BSP, there is a separate license for each derivative product offered by banks.

The proposal to adopt a higher capital adequacy ratio, however, may take time because the proposal needs an enabling law, Tetangco said.