The Monetary Board approved higher limits on Lower and Total Tier 2 capital that may form part of the qualifying capital of banks. The limits have been raised to 50 percent and 100 percent of Tier 1 capital for Lower and Total Tier 2 capital, respectively, compared to 25 percent and 50 percent, respectively, as prescribed in Circular No. 280 dated 29 March 2001.
With this move, the Philippines’ Tier 2 capital limits have now aligned with common international practice. Under the original rule, the Philippines opted for a more conservative standard. The Monetary Board liberalized the Tier 2 limits to facilitate capital raising by banks in a difficult market. A number of Philippine banks are eyeing the issuance of unsecured subordinated debt which qualifies as Tier 2 capital.
Banks are still required, as prescribed under Circular No. 280, to maintain an overall capital adequacy ratio (CAR) of at least 10 percent. The ratio is determined by dividing qualifying capital (consisting of Tier 1 and Tier 2 capital elements) by total risk-weighted assets on and off balance sheet.
Hand in hand with the increase in limits on Tier 2 capital, the Monetary Board approved some modifications to the required minimum features of subordinated term debt instruments that may qualify under Upper Tier 2 capital. The minimum period after which interest rate step-up may be allowed in connection with call option of subordinated term debt instruments qualifying under Upper Tier 2 has been lengthened from five (5) years to ten (10) years after date of issuance. Likewise, the interest rate step-up in connection with call option thereof has been set at not more than 100 basis points, subject to the same condition that only one (1) rate step-up shall be allowed over the life of the instrument.
Collectively, these new policies should further improve the overall level and quality of the Philippine banking system’s capitalization.