The Monetary Board approved the guidelines for the implementation of the Basel 3 Leverage Ratio in the Philippines. This new requirement applies to universal and commercial banks (U/KBs) as well as their subsidiary banks and quasi-banks. The framework is anchored on the international standards issued by the Basel Committee on Banking Supervision known as the Basel 3 reforms.
The leverage ratio under the Basel 3 framework relates the level of a bank’s Tier 1 capital as against its total on-book and off-book exposure. The Monetary Board approved the ratio to be 5 percent at a minimum. This effectively means that the maximum exposures that a bank can keep is 20x its Tier 1 capital.
Under the Basel 3 reform agenda, the leverage ratio needs to be appreciated alongside the Capital Adequacy Ratio (CAR). Both ratios relate a measure of capital against an indicator of bank exposure, providing quantitative guidance on the extent of assets that a bank can carry for a given level of capital. The main difference between the two ratios is that the leverage ratio treats both on-book and off-book assets uniformly without adjusting for differences in riskiness.
The approval of the Monetary Board includes a monitoring period up to end-2016. During this period, sanctions will not be imposed on banks falling below the 5 percent minimum. However, covered institutions are required to submit periodic reports. Any adjustments to the guidelines will be issued before the requirement takes full effect on January 01, 2017.
BSP Governor Amando M. Tetangco Jr. noted the dangers associated with the excessive accumulation of bank assets without corresponding capital support. He pointed to excessive leverage as one of the triggers of the recent global financial crisis.
“A careful evaluation of both the CAR and the Leverage Ratio provides the BSP and the banks themselves with a good picture of the extent of risks each bank carries in relation to the capital that could cover for those risks”, Governor Tetangco added.
The new measure is being implemented consistent with the broader financial stability agenda of the BSP aimed at mitigating the build-up of risks that can have system-wide consequences.