The Philippine banking system’s average capital adequacy ratios (CARs) as of end-December 2003 stood at 16.03 percent on solo basis and 17.47 percent on consolidated basis, way above the BSP’s required minimum ratio of 10 percent. These CARs were, however, lower by 27 basis points and 30 basis points, respectively, compared to their end-June 2003 CARs of 16.30 percent on solo basis and 17.77 percent on consolidated basis.
The reduction in the banking system’s CARs was attributed mainly to the introduction of capital charge on market risk in the capital adequacy framework for universal and commercial banks which took effect on 1 July 2003. Prior to this, only capital charge on credit risk was included in the CAR calculation for all types of banks.
The capital adequacy ratio or CAR is a risk-sensitive measure of a bank’s solvency. It relates capital to risk assets weighted according to their relative riskiness. BSP Circular No. 280 dated 29 March 2001 and BSP Circular No. 360 dated 3 December 2002, both as amended, require all banks to maintain CAR of at least 10 percent both on solo (i.e., head office plus branches) and consolidated basis (i.e., parent bank plus subsidiary financial undertakings but excluding insurance companies) covering credit risk, and for universal and commercial banks, combined credit and market risks. The BSP issuances are based on the 1988 Basel Capital Accord (also known as Basel 1) and its 1996 Amendment prepared by the Basel Committee on Banking Supervision based in Basel, Switzerland, with modifications to suit the local conditions.
Universal and commercial banks, which accounted for 90.1 percent of the banking system’s total assets, reported an overall CAR (covering combined credit and market risks) of 15.71 percent on solo basis and 17.35 percent on consolidated basis as of end-December 2003. These CARs were lower by 81 basis points and 80 basis points, respectively, if their CARs were computed based solely on credit risks as of same date, i.e., 16.52 percent on solo basis and 18.15 percent on consolidated basis. These CARs based solely on credit risks were, however, higher by 49 basis points and 44 basis points, respectively, compared to their CARs as of end-June 2003, i.e., 16.03 percent on solo basis and 17.71 percent on consolidated basis covering solely credit risk.
The overall CARs of the thrift banking industry, on the other hand, covering solely credit risk were down by one basis point and 2 basis points, respectively, (from end-June 2003 CARs of 18.95 percent on solo basis and 18.96 percent on consolidated basis) to converge at 18.94 percent on both solo and consolidated basis.
Meanwhile, the overall CAR of the rural/cooperative banking industry based solely on credit risk and on solo basis was 17.54 percent, higher by 106 basis points than their end June-2003 CAR of 16.48 percent.