Bankers back BSP plan to tighten capital requirement

By Lawrence Agcaoili, The Philippine Star

Posted at Jan 15 2012 04:13 PM | Updated as of Jan 16 2012 03:13 PM

MANILA, Philippines - Bankers welcomed the plan of the Bangko Sentral ng Pilipinas (BSP) to impose tighter capitalization requirements ahead of schedule compared to international standards, but warned the program should be adopted with caution.

Aurelio Montinola III, president of the Bankers Association of the Philippines (BAP), said in an interview with reporters that most banks operating in the country are ready to comply with the tighter capitalization requirement under the Basel III global standards.

“Directionally, the implementation of tighter rules is a good move as it adheres moves together with enhancements of international standards,” he stressed.

Montinola, who is also president and chief executive officer of the Ayala-controlled Bank of the Philippine Islands (BPI), said the Philippines is also ahead in complying with the capitalization requirements under Basel II.

However, he pointed out that the plan should be implemented with prudence.

The capital adequacy ratio (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.

Earlier, BSP Deputy Governor Nestor Espenilla Jr. said the central bank has issued a memorandum containing the implementation plans for Basel III standards on minimum capital requirement approved by the Monetary Board last Jan. 5.

The proposed roadmap contains the capital adequacy standards under Basel III that would be imposed on universal and commercial banks starting January 2014.

Espenilla said 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.

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.

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 BSP Circular 709 issued December 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 would hold consultative discussions with players in the banking industry in the first quarter of the year after which the guidelines would be finalized in the third quarter.

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

Montinola said the timetable would give banks enough time to comply with the tighter capitalization requirements.

Latest data showed that the CAR of the banking system remained healthy at 16.48 percent on a solo basis and 17.39 percent on a consolidated basis as of end-March last year from the revised end-December 2010 level of 15.99 percent and 16.93 percent despite the tensions in the Middle East and North African states as well as the sovereign debt crisis in Europe.

Data released by the BSP showed the CAR of universal and commercial banks improved to 16.42 percent as of end-March from 16.23 percent as of end-December 2010 on a solo basis and to 17.42 percent from 17.27 percent on a consolidated basis. Thrift banks improved to 16.11 percent from 12.62 percent rural banks improved to 18.86 percent from 18.2 percent; and cooperative banks increased to 16 percent from 17.13 percent.