BSP set to tighten banks' capital adequacy standards

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) is set to implement capital adequacy standards tighter than international standards to strengthen the local banking industry amid the debt crisis in Europe.

BSP Deputy Governor Nestor Espenilla Jr. said in a press conference that the central bank has laid down a roadmap wherein a capital adequacy standards under the Basel III would be imposed on universal and commercial banks starting January 2014.

Espenilla said the BSP decided to adopt the capital adequacy standards in full by January 2014 without recourse to staggered implementation or a gradual phase out of ineligible capital instruments.

He pointed out that the move recognizes the present strong capital position of the banking industry while providing for a reasonable transition period.

“Now is the perfect time to introduce reforms. Our banks are doing pretty well and they could further shore up their capitalization,” he stressed.

According to him, the BSP has previously set its Basel implementation standard higher than the international norm with a capital adequacy ratio of 10 percent versus the international norm of eight percent.

“With the new roadmap, the BSP has again set the local bar higher than the minimum international standard,” Espenilla added.

By adopting the capital adequacy standards by January 2014, the BSP official said the regulator effectively accelerates the implementation of the Basel III Accord for universal and commercial banks including their subsidiary banks and quasi-banks.

Basel III introduces a complex package of reforms designed to improve the ability of bank capital to absorb losses, extend the coverage of financial risks and have stronger firewalls against periods of stress.

The Basel Committee on Banking Supervision outlined a staggered implementation of Basel III stretching through the end of 2018 to allow internationally-active banks time to raise capital organically.

As part of the reforms, the bank regulator is set to implement a capital conservation buffer of 2.5 percent above the regulatory minimum while the common equity Tier 1 ratio would be set at a regulatory minimum of six percent higher than the international standard of 4.5 percent and the total Tier 1 ratio would be at 7.5 percent that is higher than the international treshhold of six percent.

Espenilla added that the Monetary Board also approved further streamlining of the Tier 1 and Tier 2 limits and the handling of deductions against Common Equity Tier 1 that were not covered by Circular 709 issued December of 2010.

The circular that amended the existing risk-based capital adequacy framework by adopting the minimum conditions of Basel III for inclusion of non-common equity regulatory capital instruments in qualifying capital would be derecognized starting 2014.

The BSP official said the bank regulator would hold consultative discussions with players in the banking industry in the first quarter of the year afterwhich the guidelines would be finalized in the third quarter.

This, according to him, would pave the way for a one-year parallel run of the old and new guidelines in 2013 before taking into effect starting January 1, 2014.

According to Tetangco, the central bank is announcing the capital adequacy implementation timeline to initiate a smooth transition to the new global architect.

For his part, BSP Governor Amando Tetangco Jr. said the reforms to be implemented under the roadmap would not only strengthen the banking industry in the country to be able to address potential systemic risks.

“In the end, it’s the public that benefits from better financial governance and strengthened risk management,” Tetangco stressed.