BSP sets tighter capitalization rules

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) is set to finally implement tighter capitalization standards for major players in the banking industry starting January next year to further strengthen country’s the financial sector.

BSP officer-in-charge Nestor Espenilla Jr. said monetary authorities would implement BSP Circular 639 or the implementing regulation on the International Capital Adequacy Assessment Process (ICAAP) that was supposed to take effect last Jan. 1. “We are formally launching it (ICAAP) on 2011. It is on target,” Espenilla said.

Espenilla told reporters that major players in the banking sector are ready to comply with the tighter capitalization standards to be implemented by monetary authorities at the start of next year.

Several banks issued supplementary capital instruments since hard times struck in 2008 to keep their capital levels significantly above international standards.

Unlike before, Espenilla pointed out that banks have not made any request for another deferment of the implementation of ICAAP.

“We have not received any such request and if we receive such request we are not inclined to extend further,” he added.

Under the ICAAP, banks will be required to provide sufficient capital—or other resources – to cover non-traditional types of risks involved in operating a bank. These include reputation risk, strategic risks, interest rate risks, compliance risks, liquidity risks, and credit concentration risks.

Currently, banks are only required to provide capital cover for common types of risks, mainly credit risk, which is the risk of borrowers defaulting on their loans.

The circular, which will now take effect in January 2011, states that banks must submit to the BSP a detailed report indicating all the risks it is exposed to, quantify these risks, determine the amount of capital they think is sufficient to cover for all these risks, and raise the required capital.

Banks in the Philippines managed to keep their capital levels significantly above international standards as the industry survived the impact of the global financial crisis that started in 2008.

The BSP said the banking system recorded a capital adequacy ratio (CAR) level of 15.8 percent on a consolidated basis in the second semester of last year.

“Banks remains solvent during the semester in review as CAR was above regulatory and international standards at 15.8 percent,” the central bank stated in its Status Report on the Philippine Financial System for the second semester of 2009.

The central bank pointed out that the Philippine banking system remained well above the international benchmark ratio of eight percent and the BSP’s own 10-percent minimum requirement.

The CAR is a ratio of a bank’s capital to its risk and the central bank tracks this indicator to ensure that banks have the capability to absorb a reasonable amount of loss and that they are complying with their statutory capital requirements.

The BSP added that the banks’ compliance ratio with minimum capital further strengthened to 82.6 percent from last year’s 81.7 percent.