The Monetary Board recently approved the Revised Risk-Based Capital Adequacy Framework for stand-alone thrift banks (TBs), rural banks (RBs) and cooperative banks (Coop Banks). It takes effect on 1 January 2012. Stand-alone TBs, RBs and Coop Banks are those banks that are not subsidiaries of universal and commercial banks (U/KBs). Currently, these banks are covered by Circular No. 280 dated 29 March 2001, as amended, which is primarily based on Basel 1.
The change upgrades these banks to higher capital adequacy standards, the so-called Basel 1.5 framework. On the other hand, U/KBs including their subsidiary banks and quasi-banks have already moved to Basel 2-based framework with the issuance of Circular No. 538 dated 4 August 2006, which took effect on 1 July 2007. It is a more demanding standard that covers not only the Pillar 1 component of Basel 2 that prescribes a minimum capital requirement but also Pillar 3 component on the enhanced market disclosures. The issuance of Circular No. 639 dated 15 January 2009 on the guidelines in the conduct of internal capital adequacy assessment process (ICAAP) by U/KBs on consolidated basis and of supervisory review process (SRP) by the BSP addresses the Pillar 2 component of Basel 2. When this takes effect on 1 January 2011, this completes the BSP's Basel 2 implementation for U/KBs and their subsidiary banks and quasi-banks.
Unlike the full Basel 2, the revised Basel 1.5 framework involves only a few key changes to the existing framework. They include the following:
On credit risk, the foreign currency (FCY)-denominated credit exposures to the Philippine National Government (NG) and BSP will now carry a 100% risk weight, based on the country's current sovereign rating of "BB-", from the existing 0% risk weight. The new risk weight however will be phased-in over a three-year period, i.e., only 1/3 of the applicable risk weight will be applied starting 1 January 2012, 2/3 starting 1 January 2013 and the full risk weight starting 1 January 2014. Meanwhile, peso-denominated exposures to the Philippine NG/BSP will continue to be 0% risk-weighted.
The revised framework also provides that exposures to government corporations which carry an explicit guarantee of the NG shall be 0% risk-weighted only if peso-denominated. Those that are FCY-denominated will follow the risk weight of the FCY-denominated exposures to NG/BSP.
Another change in the revised framework is the assignment of 150% risk weight (from 100%) to Real and Other Properties Acquired (ROPA). The 150% risk weight shall however be gradually implemented over a three-year period, i.e., 115% risk weight shall be applied by 1 January 2012, 130% by 1 January 2013 and 150% by 1 January 2014. This revision is aligned with the BSP's thrust of reducing the level of non-performing assets of banks to strengthen the overall asset quality of the banking system.
Another new element in the revised framework is the capital requirement for operational risk. For this purpose, the simplest approach, i.e., the Basic Indicator Approach (BIA) with minor modification shall be used. The modification entails a capital charge of 12% of the average positive annual gross income during the last three years of a bank. This was originally proposed at 15% but has been lowered to be consistent with the generally retail portfolio of the smaller banks. Moreover, it shall also be subject to staggered implementation over a three-year period, i.e., 4% capital charge shall be applied by 1 January 2012, 8% by 1 January 2013 and 12% by 1 January 2014, to allow banks time to adjust.
Designed to enhance market discipline, another new element in the revised framework is the disclosure requirements in the Annual Reports and Quarterly Published Balance Sheet. The items that would now need to be disclosed are the banks' (a) components of qualifying capital; (b) capital requirements for credit, market and operational risks; and (c) total and tier 1 capital adequacy ratios.
The adoption of this revised risk-based capital adequacy framework for stand-alone TBs, RBs and Coop Banks represents BSP's commitment to align existing prudential regulations with international standards consistent with the BSP's goal of promoting the soundness and stability of individual banks and of the banking system as a whole.