By Bianca Cuaresma
The Bangko Sentral ng Pilipinas (BSP) has issued new guidelines limiting banks’ ability to accumulate so-called risk assets by linking them to a capital-support mechanism, called the leverage ratio in this case, designed to inspire confidence among investors and the banking public.
The new guidelines come in the wake of the adoption of more stringent bank- capital standards, universally known as Basel 3.
Under the new guidelines, the banks’ leverage ratio has been set at a minimum 5 percent, a standard, that effectively limits their risk exposure to 20 times their Tier-1 capital, also known as core capital.
A bank’s leverage ratio is a measure of how much assets a bank can acquire depending on its capital.
The new ratio, as recommended by the Basel Committee, is similar to the capital adequacy ratio (CAR) already enforced at present.
The only difference is that the leverage ratio treats all bank assets uniformly without adjusting for differences in riskiness.
The higher the leverage ratio, the more secure the banks’ assets are.
The Monetary Board approved a minimum leverage ratio of 5 percent for Philippine banks—a more stringent minimum leverage ratio compared to the 3-percent minimum leverage ratio as recommended by the Basel Committee.
The BSP also adopted a higher-than-prescribed CAR for banks at 10 percent. The international standard is only 8 percent.
Responding to a query, BSP Deputy Governor for the Supervision and Examination Sector Nestor A. Espenilla Jr. said the adoption of a higher-than-prescribed leverage ratio for Philippine banks reflects the BSP confidence in the strength of the local banking system.
Espenilla said that, at present, local banks are better protected, as their leverage ratio is well above the 5-percent requirement.
The new requirement—which applies to universal and commercial banks, as well as their subsidiary banks and
quasibanks in the country—was meant to protect local banks from dangers associated with the excessive accumulation of bank assets without corresponding capital support.
“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,” BSP Governor Amando M. Tetangco Jr. said.
Excessive leverage was one of the triggers of the global financial crisis of 2008.
With the approval of the measure, the BSP gave banks sufficient lead time to comply and avoid regulatory penalties up to end-2016 and meet the new standard.
“During this period, sanctions will not be imposed on banks falling below the 5-percent minimum,” the BSP said, but quickly added that financial institutions are required to submit periodic reports.
“Any adjustment to the guidelines will be issued before the requirement takes full effect on January 1, 2017,” the central bank added.