Risk-Based Capital Adequacy Framework in the Philippines

Implementation of Basel II

The Bangko Sentral ng Pilipinas has completed the adoption of the Basel II framework for all universal and commercial banks (U/KBs) and their subsidiary banks and quasi-banks on both solo and consolidated bases.

It should be recalled that the three pillars of Basel II are (1) Minimum Capital Requirements, (2) Supervisory Review Process, and (3) Market Discipline. The first and third pillars were implemented through the issuance of Circular No. 538 dated 4 August 2006 which took effect on 1 July 2007. The said guidelines prescribe the menu of approaches that may be used in computing the regulatory capital requirements for credit, market and operational risks, as well as additional supervisory information which needs to be disclosed to the public under Pillar III.

To address the second pillar, the BSP issued Circular No. 639 on 15 January 2009. This took effect on 1 January 2011 and was made applicable to U/KBs at a consolidated level only. Circular No. 639 contains the guiding principles that (1) banks should follow in designing their Internal Capital Adequacy Assessment Process (ICAAP), and (2) BSP supervision and examination personnel should consider in assessing a bank’s ICAAP, engaging the bank in an ICAAP-dialogue, and proposing prudential measures, if deemed necessary. On 28 July 2011, the BSP came up with supplemental guidelines on the ICAAP submission of Philippine branches of foreign banks which was embodied in Circular No. 731 dated 28 July 2011. The ICAAP submissions of Philippine foreign bank branches are expected to be designed in accordance with the nature, size and complexity of their businesses in the Philippines.

Implementation of Basel 1.5

Stand-alone thrift banks (TBs), rural banks (RBs) and cooperative banks (Coop Banks), which refer to TBs, RBs and Coop Banks that are not subsidiaries of U/KBs, are covered by a separate risk-based capital adequacy framework referred to by the BSP as the Basel 1.5 framework which is a simplified version of Basel II in view of the simple operations of these covered banks. The implementing guidelines of Basel 1.5 are contained in Circular No. 688 dated 26 May 2010 which took effect on 1 January 2012.

Implementation of Basel III

The Basel Committee on Banking Supervision (BCBS) released on 16 December 2010 the Basel III rules in response to the financial crisis dilemma that unraveled in 2008. A number of jurisdictions have announced their Basel III implementation plans and these intend to release their consultation drafts in the first quarter/half of 2012.

The BSP has already laid down the groundwork for the implementation of Basel III through the issuance of Circular No. 709 dated 10 January 2011, which amends the existing risk-based capital adequacy framework by adopting the minimum eligibility criteria for inclusion of non-common equity regulatory capital instruments in qualifying capital.

Recently, the BSP announced that U/KBs will be required to adopt the capital adequacy standards under Basel III starting 01 January 2014. The broad proposals on the adoption of Basel III standards on capital adequacy are contained in Memorandum No. M-2012-002 dated 10 January 2012. This, likewise, contains the timelines for the drafting and finalization of the implementing guidelines on capital adequacy.

Outlined below are the various issuances and related materials from the BSP on the implementation of the risk-based capital adequacy standards in the Philippines:

Basel III

Originating Circulars of Current Risk-Based Capital Adequacy Frameworks

• Other Amendments to the Framework
  
  
• Reporting Templates
  
  
• News Releases
  
  
• Speeches
  
  
• Presentations