The Bangko Sentral ng Pilipinas (BSP) announced that the country’s universal and commercial banks (U/KBs) will be required to adopt the capital adequacy standards under Basel III starting 01 January 2014. This puts the Philippines alongside such jurisdictions as China, Australia, Hong Kong SAR and Singapore which have announced similar Basel III implementation plans.
Basel III introduces a complex package of reforms designed to improve the ability of bank capital to absorb losses, extend the coverage of financial risks and have stronger firewalls against periods of stress. However, the Basel Committee on Banking Supervision (BCBS) outlined a staggered implementation of Basel III stretching through the end of 2018 to allow internationally-active banks time to raise capital organically.
The Monetary Board decided to adopt the capital adequacy standards in full by January 2014 without recourse to a staggered implementation or a gradual phase-out of ineligible capital instruments. This recognizes the present strong capital position of the banking industry while providing for a reasonable transition period.
The BSP had previously set its Basel implementation standard higher than the international norm. While the Basel II Accord required a regulatory minimum for the Capital Adequacy Ratio at 8%, the BSP set the standard in the Philippines at 10%.
With the new roadmap, the BSP has again set the local bar higher than the minimum international standard. By adopting the capital adequacy standards by January 1, 2014, the BSP effectively accelerates the implementation of the Basel III Accord for universal and commercial banks, including their subsidiary banks and quasi-banks.
BSP Governor and Monetary Board Chairman Amando M. Tetangco Jr. pointed that “we are able to define our roadmap in this way because our universal and commercial banks do not face the same difficulties as those, for example, in the eurozone. We have to recognize that the reforms are not just to strengthen the banks individually but rather the system as a whole so that we are better able to address potential systemic risks. In the end, it’s the public that benefits from better financial governance and strengthened risk management.”
A highlight of Basel III is the higher proportion of bank capital that is represented by common equity. Under the BSP framework, Common Equity Tier 1 (CET1) ratio will be set at a regulatory minimum of 6.0% while the total Tier 1 ratio will be at a 7.5% minimum. Both ratios are higher than the respective minima under Basel III.
Total Tier 1 capital is made up of common equity and the so-called “going concern” capital.
The BSP also announced that it will implement a capital conservation buffer of 2.5% above the regulatory minima.
There are other components of the Philippine Basel III implementation that the Monetary Board approved during the December 27 MB meeting. These included the criteria for eligible capital instruments that are not yet covered by Circular No. 709, a further streamlining of the Tier 1 and Tier 2 limits and the handling of deductions against CET1.
Circular 709, issued in December 2010, amended the existing risk-based capital adequacy framework by adopting the minimum conditions of Basel III for inclusion of non-common equity regulatory capital instruments in qualifying capital.
Full details of the capital adequacy guidelines will be contained in a consultation draft to be released to U/KBs by the first quarter of 2012. The guidelines will be finalized by the third quarter of 2012 to allow one full year for a parallel run of the old and new guidelines before the new standards come into force on 1 January 2014.
The capital adequacy implementation plans for stand-alone thrift banks, rural and cooperative banks will be announced at a later date. Under present guidelines, these banks are scheduled to transition on 1 January 2012 to the Basel 1.5 framework as set out under Circular No. 688 dated 26 May 2010.
Implementation guidelines on other aspects of Basel III will be announced in 2012, including the BSP’s approach towards leverage and liquidity. The Basel III component introducing a countercyclical capital buffer will be also further studied by the BSP.
The BSP is announcing the capital adequacy implementation timeline to initiate a smooth transition to the new global architecture. Since Basel III is a complex reform agenda that is made up of several inter-related components, banks are enjoined to actively consider these reforms in conjunction with other initiatives of the BSP such as ICAAP and the semestral stress testing exercise.