The Monetary Board approved on 14 October 2004 a plan that would adopt the revised framework of the International Convergence of Capital Measurement and Capital Standards, or more popularly known as Basel 2 Accord, in the Philippines. Basel 2 is issued by the Basel Committee on Banking Supervision, which is an international group of banking supervisors based at the Bank for International Settlements in Basel, Switzerland. Basel 2 is a revision of the original 1988 Basel Capital Accord (Basel 1) and features a 3-pillar approach. It offers a new set of standards for establishing minimum capital requirements for banking organizations worldwide (Pillar 1). In addition, Basel 2 also sets standards for the supervisory review process (Pillar 2) and for disclosure practices (Pillar 3).
The BSP has already adopted Basel 1, with appropriate modifications to suit Philippine conditions, through Circular No. 280 dated 29 March 2001, including the 1996 Market Risk Amendments through Circular No. 360 dated 3 December 2002.
While Basel 1 covers only credit risk and market risk, Basel 2 also covers operational risk. In addition, while Basel 1 uses a rather crude risk weighting system for credit risk, Basel 2 maps external or internal ratings into appropriate risk weights, thus making the new framework more risk sensitive.
Ever since the first consultative document on Basel 2 was released in 1999, the BSP has already started its preparations for its eventual adoption in terms of gradually changing its regulatory framework, enhancing corporate governance in banks, capacity building, and supporting the establishment of critical market infrastructures, among others. For example, the BSP has issued a series of guidelines in the last 2 years primarily strengthening BSP’s compliance with the Basel Core Principles for Effective Banking Supervision, as well as with the international standards for corporate governance. Moreover, the BSP has also supported the development of the domestic credit ratings industry through the issuance of the recognition and derecognition guidelines for credit rating agencies. Presently, the BSP is pushing for legislative changes to its Charter to include provisions necessary for the effective implementation of Basel 2.
The BSP has also been very active during the consultation period leading to the issuance of Basel 2 both in the intraregional level through its membership in various regional groups, and in the interregional level through its participation in the Non G-10 Quantitative Impact Study 3 Group.
The BSP intends to fully adopt the standardized approaches of Basel 2 by 2007. Universal and commercial banks, together with their affiliate thrift banks, will be expected to comply with these approaches. The other thrift banks and all rural banks will be subject to an enhanced Basel 1-type approach, which is basically the same as the current framework but with certain elements of Basel 2 already incorporated, particularly on supervisory review (Pillar 2) and disclosure (Pillar 3).
Even prior to 2007, however, certain provisions of Basel 2 will be gradually incorporated into the current framework, such as the lower risk weighting for highly-rated corporate entities, the higher risk weighting for past due claims, and the standardized approach for securitization exposures. Draft implementation guidelines on all other Basel 2 provisions, including a new set of disclosure requirements, will be issued to the industry for comment in the first quarter of 2005. The final implementation guidelines will then be issued by end-2005, to take effect in 2007.
The more advanced approaches involving internal modeling for both credit risk and operational risk will be allowed by 2010. This is to allow the compilation of a minimum database to support modeling requirements. This will also allow industry players and the BSP an adequate period to upgrade technical skills.
The BSP is one of about 100 banking supervisors worldwide that had already signified their intention to adopt Basel 2 in their respective jurisdictions.
“The Monetary Board has determined that it is in the country’s best interest to bring our banking system into eventual full compliance with the Basel 2 framework. This undertaking entails adoption of deep reforms in how banking is conducted that will result in a stronger banking system. We call upon the banking industry to take all necessary steps as soon as possible to prepare for this. The BSP will closely consult with the industry to ensure a smooth and orderly implementation,” BSP Governor Rafael B. Buenaventura said.