As of end-June 2005, the risk-based capital adequacy ratios (CARs) of the banking system remained well above the 10 percent minimum CAR prescribed under Circular No. 280 dated 29 March 2001 and Circular No. 360 dated 3 December 2002, both as amended. The banking system’s CARs however were slightly lower as compared to that of the previous quarter since the build-up of capital was a little behind the increase in risk-weighted assets during the period.
The CAR on a solo basis of the banking system declined to 16.48 percent from 17.06 percent as of end-March 2005. The CAR on a consolidated basis likewise decreased to 17.36 percent from 18.10 percent over the same period. These CARs cover capital charges for combined credit and market risks as provided for under Circular Nos. 280 and 360, respectively.
The CAR reductions, i.e., by 58 basis points and 74 basis points, respectively, were traced to the moderate expansion of qualifying capital as compared to that of the banking system’s risk-weighted assets. On a solo basis, risk-weighted assets grew by 5.40 percent to P2.54 trillion from P2.41 trillion over a 3-month period. On a consolidated basis, the banking system’s risk-weighted assets expanded by 5.94 percent to P2.72 trillion over the same period. The industry’s qualifying capital likewise increased albeit at a much slower pace as compared to its risk-weighted assets. The industry’s qualifying capital increased by 1.82 percent on a solo basis (i.e., to P418.7 billion from P411.2 billion in end-March 2005) and by 1.59 percent on a consolidated basis (i.e., to P471.5 billion from P464.1 billion). On a solo basis, the total qualifying capital consisted of P354.9 billion Tier 1 capital (or 84.75 percent) and P63.8 billion Tier 2 capital (or 15.25 percent). On a consolidated basis, Tier 1 capital amounted to P397.4 billion (or 84.28 percent of total industry’s qualifying capital) while Tier 2 capital stood at P74.1 billion (or 15.72 percent).
Banks are required to maintain CAR of at least 10 percent both on a solo (i.e, head office plus branches) and on a consolidated basis (i.e., parent bank plus subsidiary financial allied undertakings but excluding insurance companies). The CAR is a risk sensitive measure of a bank’s solvency. It relates capital to risk assets weighted according to their relative riskiness. The BSP prescribed CAR framework was based on the 1988 Basel Capital Accord (also referred to as Basel 1) and its 1996 Amendment, which were prepared by the Basel Committee on Banking Supervision based in Basel, Switzerland. Modifications have been introduced to suit Philippine setting.