MANILA, Philippines - Additional funds for lending and better capital position for banks are expected as a result of the reduction in risk weights on bond holdings due to the country’s promotion to investment grade, the central bank said.
According to simulations by the Bangko Sentral ng Pilipinas (BSP), a total of P147.13 billion would be freely available for banks to “be released for loans and other expenses†after sovereign risk weights were reduced.
Universal and commercial banks’ capital adequacy ratio (CAR), it said, could also improve to 17.83 percent from 17.28 percent using end-2012 figures. The minimum CAR prescribed by the BSP is 10 percent.
“These are the direct gains that accrue with the investment-grade rating,†BSP Governor Amando Tetangco Jr. said.
“The impact is not only about the feel-good effects of a lower risk weight but that there are balance sheet implications to consider as well,†he added.
Debt watchers Fitch Ratings and Standard & Poor’s Ratings Services upgraded the country’s credit rating to BBB-, an investment grade status, in March and May, respectively. The ratings’ outlook is stable.
Credit rating is basically a perception of investor risk and with the Philippines bagging an investment-grade status, the riskiness of its assets has decreased.
As a result, the central bank, under Memorandum 2013-028, decided to reduce the credit risk weight of foreign currency denominated sovereign bonds held by banks to 50 percent from 100 percent originally.
The capital charge for interest rate risks on bond holdings issued by the government was also reduced from eight percent to a range of 0.25 and 1.60 percent, the memo added.
“The higher risky assets you have the higher capital you need. Since the Philippines is now investment grade, capital charges you need to set aside for a particular asset went down,†said Emilio Neri Jr., economist at the Bank of the Philippine Islands.
Thus, Neri said, funds originally set aside by banks “for prudential purposes†may now be used to fund lending activities, which in turn could support economic activity.
“It frees up more funds. We can now mobilize those funds more likely to the benefit of the economy,†he explained.