MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) has issued a moratorium on the issuance of supplementary capital other than stockholders’ equity by banks after the Basel III agreement approved in Switzerland last month tigthened the definition of instruments that would be eligible as bank capital.
BSP Governor Amando M. Tetangco Jr. said the Monetary Board has approved the moratorium on the approval of Hybrid Tier 1, Tier 2, and other redeemable capital instruments due to the changes being proposed by the oversight body of the Basel Committee on Banking Supervision, the Group of Central Bank Governors, and Heads of Supervision announced last Sept. 12.
“This takes into account possible changes in the composition of capital under Basel III. No moratorium on common equity qualifying as core Tier 1. Other debt instruments not for consideration as Tier 1 or Tier 2 can also go ahead in accordance with existing rules,” Tetangco stressed.
He pointed out that the Basel III agreement tigthened the definition of instruments that would be eligible as bank capital and formalized the policy intention for banks to rely more on common equity in complying with the minimum capital adequacy ratio.
Under the so-called Basel III standards, banks would be required to hold core tier one capital of 4.5 percent from two percent under previous agreements. In addition, a further ‘capital conservation buffer’ would be required, bringing the total ratio of capital to assets that banks must hold to seven percent.
Banks would have less than five years to comply with the minimum ratios — 4.5-percent common equity and six percent Tier 1 — and until January 2015, to meet the buffer requirements. Tier 1 capital, whose definition has been narrowed by the Basel committee, includes common equity and perpetual preferred stock.
Banks are currently required to have common equity equal to two percent of total assets and four percent Tier 1 capital.
The committee also gave banks until the end of 2017 to comply with the tighter definitions of capital and said that a new short-term liquidity standard would not be implemented until the beginning of 2015.
While a separate long-term liquidity rule has been shelved under pressure from the banking industry, the short-term rule was expected to go into effect earlier. The two liquidity rules would require banks to hold enough cash and easily cashable assets to meet liabilities.
Tier 1 capital is considered as the more reliable form of capital consisting largely of shareholders’ equity and retained earnings as “Core” Tier 1 capital and common stock known as Tier 1 capital securities. Tier 2 capital is the second most reliable form of financial capital supplementary capital that comprise of undisclosed reserves, revaluation reserves, general provisions, hybrid instruments and subordinated term debt.
Under current BSP guidelines, Hybrid Tier 1 such as perpetual preferred stock and perpetual unsecured subordinated debt fall under Tier 1 capital that would not be part of common equity while redeemable capital instruments such as unsecured subordinated debt and other lower Tier 2 capital are categorized as Tier 2.
BSP Deputy Governor Nestor Espenilla Jr. signed Memorandum No. M - 2010-037 informing all banks and non-bank financial institutions on the moratorium on the approval of Hybrid Tier 1, Tier 2, and other redeemable capital instruments.
“To avoid unwarranted uncertainty with the adoption of Basel III reform package en toto, a moratorium on approvals of Hybrid Tier 1, Tier 2, and other redeemable capital instruments is hereby imposed effective immediately,” Espenilla stated in the two-page memo dated Oct. 21.