BSP sets tighter credit standards

MANILA, Philippines –  The Bangko Sentral ng Pilipinas (BSP) said the implementation of tighter capitalization standards for major players in the banking industry next year would further strengthen the country’s financial sector.

BSP Governor Amando M. Tetangco Jr. said in an interview with reporters that the BSP is ready to implement BSP Circular 639 or the implementing regulation on the International Capital Adequacy Assessment Process (ICAAP) on Jan. 1.

“On the banking side, we are going to implement the ICAAP next year so this will further improve the capital adequacy assessments of banking institutions and therefore contribute to further improvement in the financial conditions of the banks,” he said.

The new rules were supposed to take effect early this year but monetary authorities agreed to give banks more time to comply and beef up their capitalization.

The BSP believes that major players in the banking sector are prepared 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.

Under the ICAAP, banks would 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 would 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 14.9 percent on a solo basis and 15.95 percent on a consolidated basis as of end-March this year.

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 number of banks in the country declined by 31 to 773 in the first half of the year from 804 in the same period last year indicating the continued consolidation of banks as well as the exit of weaker players. Data showed that the number of universal and commercial banks was steady at 38 while the number of thrift banks was also unchanged at 74.