October 13, 2019 at 08:10 pm
Julito G. Rada
The Bangko Sentral ng Pilipinas said the country’s biggest banks or the so-called domestic systemically important banks should have a higher capitalization to make them more resilient during an economic crisis.
It said that under the new requirement, the minimum common equity tier 1 capital of S-SIBs should increase by 1.5 percent to 2.5 percent of total risk-weighted assets, depending on their degree of systemic importance.
The BSP said in a statement over the weekend the policy-setting Monetary Board included the requirement in the newly-approved enhanced framework on D-SIBs, in line with the international standards that aim to safeguard the stability of the financial system.
It said the D-SIBs framework was in line with the initiatives pursued under the Basel 3 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 said enhancements capture a bank’s systemic importance in the Philippines following the latest developments in the banking sector and methodologies in the identification of D-SIBs,” the BSP said.
It said the enhanced framework included the revision in the differential weights of categories/indicators and the composition of indicators, including the adoption of threshold level; and, calibration of the level of additional capital requirement.
“These enhancements shall be applied on a consolidated basis to all universal and commercial banks as well as their subsidiary banks and quasi-banks, and branches of foreign banks,” the BSP said.
Under the revised framework, a bank’s systemic importance is assessed based on pre-defined indicators for “size”, “interconnectedness”, “substitutability”, and “complexity”.
Among the four categories, “size” and “interconnectedness” bear greater weight as these factors are more critical measures in determining a bank’s systemic importance in the Philippines, taking into consideration the simple structure of the Philippine financial system.
D-SIBs are then identified based on overall scores as against certain threshold. To complement this quantitative assessment, supervisory judgment is also exercised, as necessary, to consider factors that are not captured in the quantitative indicator-based measurement approach.
This qualitative assessment–which may result in adding and/or removing banks to/from the list of D-SIBs–should be exercised in accordance with approved principles pursuant to BSP regulations.
“Depending on the degree of systemic importance, identified D-SIBs will be categorized into different higher loss absorbency [HLA] buckets and will be required to increase their minimum common equity tier 1 [CET1] capital by 1.5 percent to 2.5 percent of total risk- weighted assets,” the board said.
“The requirement to have HLA or additional capital in the form of CET1 capital aims to bolster the resilience of D-SIBs. This is on top of the existing CET1 minimum, capital conservation buffer, and countercyclical capital buffer required from all universal and commercial banks, as well as their subsidiary banks and quasi-banks,” it said.
D-SIBs slotted under bucket 1 will have a uniform 1.5 percent HLA requirement, while those slotted under bucket 2 will have a differentiated HLA requirement of up to a maximum of 2 percent).
An empty bucket 3 with HLA requirement of 2.5 percent is also maintained to provide incentives for banks to avoid becoming more systemically important.
“Failure to meet the foregoing regulatory minimum will subject the bank to constraints in the distribution of their income,” the BSP said.
Apart from requiring D-SIBs to have higher capital, all D-SIBs are subject to more intensive supervisory approach and will be required to adopt a concrete and acceptable recovery plan that will address the risks they pose to the financial system and the real economy.
Banks identified as D-SIBs are individually informed of their designation as a D-SIB with details as to the HLA bucket they belong to and the individual score for each indicator, the Monetary Board said.