BSP finalizes list of 'too big to fail' banks

By Lawrence Agcaoili, The Philippine Star

Posted at Jul 08 2015 08:07 AM | Updated as of Jul 08 2015 04:07 PM

MANILA - The Bangko Sentral ng Pilipinas (BSP) has completed its determination of domestic systemically important banks (D-SIBs) nine months after ordering banks deemed “too big to fail” to set aside higher levels of capital for potential losses.

BSP Governor Amando Tetangco Jr. said the central bank has classified banks depending on the extent of their systemic importance using pre-defined indicators for size, interconnectedness, substitutability and market reliance as a financial market infrastructure as well as complexity.

The D-SIBs framework is in line with the initiatives pursued under the Basel III reform agenda. D-SIBs are characterized as banks whose distress or disorderly failure would cause significant disruptions to the wider financial system and economy.

“The higher bar for D-SIBs in terms of capital requirement and supervisory expectations serves to strengthen the system by lowering the probability of systemic bank failures,” Tetangco said.

The BSP chief reiterated the banking system remains in a strong position and the D-SIBs guidelines are “pro-active measures to sustain such strength.”

Tetangco said the higher minimum Common Equity Tier 1 (CET1) threshold would not be disruptive since “our internal simulations affirm a reasonable earnings retention program would be sufficient to bring the capital level of D-SIBs within the required threshold.”

The BSP said it would update the list of D-SIBs every year and each bank would be individually notified of their classification. The BSP said the list of D-SIBs is highly confidential.

Those identified as D-SIBs would be required to maintain additional CET1 of between 150 and 250 basis points of the bank’s risk-weighted assets beginning January 2017 until the same are fully in place by January 2019.

D-SIBs must also meet higher supervisory expectations. In the annual submission of their ICAAP document (internal capital adequacy assessment process), D-SIBS must have in place acceptable recovery plans to be carried out in the event of breaches in capital requirements.

In October last year, the BSP forced large banks to set aside higher levels of capital. Regulators hope to remove the “moral hazard” of government bailouts for lenders that take advantage of loose regulations to take excessive risks.

The directive was issued a few weeks after it announced other rule changes that affect the country’s banking sector, including a rule that linked the size of a bank’s branch network to the minimum amount of capital it would need to put up.

Another rule was a shift in the way banks should treat borrowers wherein a premium was put on borrowers’ income streams instead of the previous practice of focusing on collateral.

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