The Monetary Board (MB) approved amendments to the capital framework of foreign bank branches (FBBs) operating in the Philippines. The amendments will align the capital structure of FBBs with the implementation of the Basel III Accord while further strengthening the capacity of FBBs to absorb risks from their operations in the Philippines.
Under the new framework, the capital component of FBB that is classified as Tier 1 shall be predominantly composed of permanently assigned capital (PAC). The concept of PAC was initially introduced by law under Republic Act 7721 (An Act Liberalizing the Entry and Scope of Operations of Foreign Banks in the Philippines and for Other Purposes).
On the other hand, FBB accounts which are booked under the “Net Due To” account will now be re-classified as Tier 2 capital. These “Net Due To” accounts typically reflect transactions between the FBB and its parent entity and include placements, investments and borrowings.
“Net Due To” accounts were previously categorized as Tier 1 capital under the older Basel II framework. The new policy is consistent with the intention of the reforms under Basel III to classify as Tier 2 the debt instruments that are deemed eligible as Basel III capital.
The Philippine implementation of the Basel III framework that is set for the beginning of 2014 will also apply to FBBs since these branches operate locally under either a universal or commercial bank license.
This means that FBBs must meet all the prescribed minimum ratios. These include a 6 percent Common Equity Tier 1 (CET1) ratio, a 7.5 percent Tier 1 ratio and a 2.5 percent capital conservation buffer which can only be met by CET1-eligible instruments.
For the FBBs, common equity is represented by PAC.
With the recent amendment approved by the Monetary Board, FBBs which do not meet the prescribed minimum capital ratios on January 01, 2014 will be given a year or up to January 01, 2015 to comply. However, a capital build up plan must be submitted by these FBBs to the BSP by April 01, 2014. This capital build up plan does not only reflect how these FBBs intend to meet the new prudential thresholds but also the necessary approvals from their parent entity.
Governor Amando M. Tetangco Jr noted that “this new initiative strengthens foreign bank branches in the Philippines because they will have their capital onshore when they take on onshore risks”. He added that this is the “prudent policy direction since it will reduce unwarranted reliance of foreign bank branches on their parent entity for capital support when operating domestically”.