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Monetary Board Approves New Guidelines on Capital Charge for Market Risks

11.12.2002

The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas (BSP), approved on 7 November 2002 the guidelines to incorporate capital charge for market risks into the risk-based capital requirement. The guidelines are based on the 1996 Amendment to the 1988 Basel Capital Accord issued by the Basel Committee on Banking Supervision based in Basel, Switzerland.  The Basel Capital Accord is currently the international standard for setting minimum capital adequacy requirements by national bank supervisory authorities worldwide.

The new guidelines complement the existing risk-based capital adequacy framework covering only credit risks as prescribed under Circular No. 280 dated 29 March 2001.  Circular No. 280 took effect on 1 July 2001.  However, the new guidelines on market risks will initially apply only to universal banks and regular commercial banks, although it will also effectively extend to their subsidiary banks like thrift banks and quasi-banks because of consolidated reporting.  With these new guidelines, the Philippines’ prudential regulations on capital are now fully aligned with current international standards.

The market risks covered under the new guidelines are interest rate risk and equity price risk in the trading book, and foreign exchange risk throughout the bank.  Accounts in the trading book which are subject to market risk capital charge will no longer be subject to credit risk capital charge prescribed under Circular No. 280.  The guidelines also give banks the option to use either the standardized approach as prescribed in the guidelines or their own internal models for purposes of measuring and calculating capital charge for market risks.  The use of internal model-based approach is, however, subject to prior BSP approval based on meeting certain qualitative and quantitative conditions relating to the model accuracy and reliability and the controls surrounding them.

Under the new guidelines, the capital charge for traded Philippine government securities may increase while that for highly rated traded private corporate securities may decrease.  Traded Philippine government securities, for example, which used to be zero percent risk-weighted under the credit risk capital adequacy framework, shall still attract zero percent capital charge for specific risk (analogous to credit risk), but may attract an escalating capital charge for general market risk depending on their coupon rates and residual maturities.

Universal banks and regular commercial banks are required to maintain daily the 10 percent minimum capital adequacy ratio (CAR) against combined credit risks and market risks both on solo basis (i.e., head office and branches) and on consolidated basis (parent banks and subsidiary financial allied undertakings, excluding insurance companies).  They are, moreover, required to submit quarterly reports on their capital position.

The new guidelines take effect on I July 2003, with trial reports to be submitted by banks starting with the end-March 2003 reports.  This is to give banks time to adjust their balance sheets and to put in place the necessary systems to meet the new requirement.

“We encourage our banks to prepare for implementation as soon as possible so that the phase-in will be as orderly as possible.  Once again, we remind the banking system to plan ahead their capital requirements in line with our desire to bring the country fully in line with international standards,” BSP Governor Rafael B. Buenaventura said.

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