The Monetary Board (MB) has approved the implementing guidelines for the 01 January 2014 adoption of the revised capital standards under the Basel III Accord for universal and commercial banks (U/KBs) in the Philippines.
According to Bangko Sentral ng Pilipinas (BSP) Governor and Monetary Board Chairman Amando M. Tetangco, Jr., “The transition to the Basel III standards is an important step towards further strengthening the banking system.”
The guidelines set new regulatory ratios related to bank capital. Banks must now meet specific minimum thresholds for so-called Common Equity Tier 1 (CET1) capital and Tier 1 (T1) capital in addition to the Capital Adequacy Ratio (CAR). These regulatory thresholds effectively move banks worldwide to rely more on core capital instruments like CET1 and T1 issues. This is in lieu of hybrid instruments which did not fare well in the latest global crisis as far as absorbing losses. The ability to absorb losses is central to Basel III.
The BSP maintained the minimum Capital Adequacy Ratio (CAR) at 10.0 percent. In addition to CAR, the new framework sets a CET1 ratio of at least 6.0 percent and the Tier I capital ratio is at a minimum of 7.5 percent.
The new guidelines also introduce a capital conservation buffer of 2.5 percent which shall be made up of CET1 capital. In addition, banks which issued capital instruments from 2011 will be allowed to count these instruments as Basel III-eligible until end-2015
The BSP sees a generally smooth transition to the new standards, with the capitalization of banks operating in the Philippines traditionally set above the international and regulatory minima. At end-March 2012, the U/KB industry’s CAR averaged 16.85 percent on solo and 18.01 percent on consolidated basis, with Tier 1 at around 14 percent.
The BSP has been in discussion with the banking industry on the Basel III guidelines for some time. By allowing the new guidelines to take effect on 01 January 2014, the BSP expects a smooth transition among universal and commercial banks which are all covered by the guidelines.