Just a day after man-dating a fourfold increase in lender capital in anticipation of more stringent global competition, the Bangko Sentral ng Pilipinas (BSP) issued a new mandate expanding the banks’ buffer, or reserve funds, as added measure.
The new fortifications are directly aimed at so-called systemically important financial institutions (FIs), or those lenders considered too big to fail.
In a statement issued on Tuesday, the central bank said systemically important banks, local financial institutions whose distress or disorderly failure would cause significant disruptions to the wider financial system and the economy, are required to raise their common equity Tier 1 (CET1) depending on their classification.
CET1 represents the highest quality of bank capital qualified under the new Basel 3 capitalization rules.
The new framework, the BSP said, should help strengthen financial markets and remove the moral hazard of publicly funded bailouts as required by the Basel 3 reform agenda.
“Global reforms on the treatment of systemically important financial institutions have been initiated in the light of socioeconomic costs arising from the financial crisis. This includes government bailout of failed financial institutions particularly in advanced economies,” the central bank said.
According to the BSP, banks will be evaluated based on size, interconnectedness, financial institution infrastructure and complexity.
“Although these measures are largely quantitative, supervisory judgment may also be applied as warranted in determining a bank’s systemic importance,” the central bank added.
The bigger the financial institution and the more complex its dealings in the markets, the greater the amount taken from its assets and set aside as buffer, the central bank said.
Similar structures have been set up by regulators in other markets and jurisdictions for precisely that situation when public funds have to be rechanneled to privately held undertakings to prevent failures that do even more harm were the systemically important financial institutions allowed to fall by the wayside.
After the evaluation, banks will be slotted in one of three “buckets” of systematic importance based on their composite score on all four major evaluation factors.
Systemically important banks will have to raise their minimum CET1 ratio by 1.5 to 3.5 percent depending on their level of importance.
This higher CET1 ratio will be on top of the existing CET1 minimum ratio of 6 percent and the capital conservation buffer of 2.5 percent as mandated by the central bank just this year.
Failure to meet the requirements, according to the BSP Governor Amando M. Tetangco Jr., would be subject to constraints in the distribution of their income.
Tetangco also said systematically important banks will be given ample time to meet the higher capital ratio.
“Should banks be unable, limiting the distribution of profits is the way for these banks to build up their capital position by rechanneling their profits,” the central bank governor said, adding this restriction would be lifted once the capital ratios are brought to the required minimum.
The BSP said that by mid-2015, regulator were to inform each bank if they are classified as systematically important. These banks will have to be able to meet the CET1 requirement by 2019.
Whether or not specific banks are systematically important will not be made public to “minimize potential moral hazard.”
On Monday the central bank rolled out the latest banking sector reforms, one seeking to lift the banks’ minimum capital level, and the other amending the rules on credit-risk management.
The new credit-risk management rules allow lenders to focus on capacity to pay and analysis on client cash flow to determine credit worthiness.
“By focusing primarily on cash flow and ability to pay, the BSP is signaling that collateral should only play a supporting role in credit decisions. This regulatory point of view is expected to give banks more leeway to lend to customers who are creditworthy but may not necessarily have collateral, particularly real estate, which could unduly restrict access to credit,” the central bank said.