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Monetary Board Expands Allowable Investments for UBs and KBs

01.07.2005

The Monetary Board recently approved guidelines for banks’ investments in certain securities including the capital treatment thereof.  This is in line with the Bangko Sentral ng Pilipinas’ (BSP) thrust to encourage banks to diversify their investment portfolios in order to stabilize earnings, control maturity mismatches and minimize overconcentration of exposures.

Under the new rules, expanded foreign currency deposit units (EFCDUs) of commercial banks (KBs) and universal banks (UBs) without expanded derivatives authority will be allowed to invest in certain structured products without need of prior BSP approval.  Structured products refer to financial instruments where the return is a function of one or more underlying indices, such as interest rates, equities and exchange rates.  There may also be embedded derivatives such as swaps, forwards, options, caps, and floors that reshape the risk-return pattern.

The allowed investments in structured products are those issued by banks and special purpose vehicles (SPVs) of high credit quality, provided that the revenue streams of such products may only be linked to interest rate indices and/or foreign exchange rates other than those that involve the Philippine Peso.  These, however, exclude asset-backed securities, credit-linked notes and other similar instruments.  In addition, banks must comply with maximum maturity limits, booking guidelines, prudential limits, and risk management prerequisites.  The latter include having established internal processes to identify, evaluate, monitor and manage the risk exposures created by their investments in structured products.

The Monetary Board likewise approved the investment of all UBs and KBs in securities arising from securitization structures.  However, banks without expanded derivatives authority may only invest in exposures that are rated at least “A” or its equivalent by BSP-recognized credit rating agencies.

In order to ensure that banks hold capital commensurate to the risks attendant to their exposures, amendments to the current capital adequacy framework are likewise being introduced. The corresponding risk weights for these instruments shall be in accordance with international standards.  However, risk weights for structured products shall be a notch higher to account for other risks attendant to such instruments.

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