New capital adequacy rules effective in July

The Bangko Sentral ng Pilipinas (BSP) clarified anew its recently announced policy on risk weighting of assets under the new risk-based capital adequacy guidelines for banks based on the Basle Committee recommen-dation.

The guidelines, which will take effect on July 1, 2001, require banks to maintain a minimum capital-to-risk assets ratio of 10 percent, the same as the current requirement, computed both on solo and consolidated basis.

Under the guidelines, assets are classified into four risk buckets, i.e., zero percent, 20 percent, 50 percent and 100 percent, according to the debtor category. Debtors are broadly categorized into sovereigns, banks and corporates, with sovereigns and banks being further categorized into those which are of "highest credit quality" and those which are not.

Sovereigns and banks of "highest credit quality" refer to those which have been given the highest credit rating by at least two of the following inter-nationally accepted rating agencies: Moody’s ("Aa3" and above), Standard and Poor’s ("AA-" and above), Fitch IBCA ("AA-" and above), and other rating agencies as may be approved by the Monetary Board.

Claims from sovereigns of "highest credit quality" attract 0 percent risk weight. Claims from the government and BSP also attract zero percent risk weight.

Claims from banks of "highest credit quality", on the other hand, are ascribed a 20-percent risk weight; while claims from corporates are assigned the more common risk weight, i.e., 100 percent.

Claims from commercial companies owned by sovereigns are also assigned 100 percent risk weight to maintain a level playing field with similar private sector commercial companies.

Claims guaranteed by and/or collateralized by securities issued by sovereigns of "highest credit quality" and by the national government and BSP are allocated the same risk weight as their guarantors and/or issuers of the securities, i.e., 0 percent risk weight.

Thus, loans to government-owned and controlled corporations, such as the Philippine National Oil Co., National Power Corp., Metropolitan Waterworks and Sewerage System, National Irrigation Administration, Light Rail Transit Authority, Local Water Utilities Administration, National Electrification Administration, National Housing Authority, Philippine National Railways, Philippine Ports Authority, National Food Authority, and Philippine Economic Zone Authority continue to be treated as non-risk assets, provided that such loans are unconditionally guaranteed by the Philippine national government.

Loans for housing purpose, fully secured by first mortgage on residential property that is or will be occupied or leased out by the borrower, are likewise ascribed a preferential 50 percent risk weight. By definition, however, these loans would exclude loans to companies engaged in speculative residential building and property development.

Cash on hand (including foreign currency notes and coins on hand acceptable as international reserves) is assigned 0 percent risk weight; while checks and other cash items (including those denominated in foreign currencies acceptable as international reserves) are ascribed a 20 percent risk weight.

Meanwhile, bank premises, furniture, fixtures and equipment (net of accumulated depreciation) and real and other properties owned or acquired (net of allowance for probable losses) attract 100 percent risk weight.

In contrast with the required minimum net worth to risk assets ratio under the old General Banking Act (R. A. No. 337), off-balance sheet exposures are now incorporated into the risk weightin g system.

This is done through a two-step process: first, the credit equivalent amount of an off-balance shset item is calculated by applying the appropriate credit conversion factor (i.e., 100 percent, 50 percent, 20 percent or 0 percent, as the case may be) to the notional principal amount; and saecond, the credit equivalent amount is treated like any on-balance sheet asset and is assigned the appropriate risk weight depending on the category of the borrowers and/or qualified guarantor/collateral.

When the new system takes effect, the Philippines will be more aligned with international best practices. However, BSP has also indicated that further refinements to the risk-based capital rules should be expected in the near future in the light of the proposed amendments to the Basle Capital Accord that are now being considered by the international community.