• Banks face stricter property lending rules


    No imminent property bubble, but  stress tests a pre-emptive measure

    The Monetary Board (MB) of the Bangko Sentral ng Pilipinas (BSP) sees no imminent danger of a property bubble in the financial system, but has approved a pre-emptive macro-prudential policy measure to ensure the banking industry maintains a healthy exposure to real estate development.

    In a statement released late Wednesday, the Board said that stress tests will be conducted under the new prudential guideline to determine whether the capital level of a bank is sufficient to absorb the credit risk to real estate.

    However, the MB clarified that the new measure does not reflect any imminent vulnerability among banks with exposures to the real estate sector. Instead, the measure simply reinforces the prudential policy that banks must have sufficient capital to absorb any possible shock on its credit exposures, it said.

    The MB noted that banks are expected to meet two specific thresholds under the new measure.

    First, universal, commercial (U/KBs) and thrift banks must meet a capital adequacy ratio of 10 percent of qualifying capital after adjusting for the stress test results.

    Second, U/KBs as well as their thrift bank subsidiaries will be required to maintain a level of Common Equity Tier 1 that is at least 6 percent of qualifying capital after factoring in the stress scenario.

    For stand-alone TBs, however, the relevant measure will be a Tier 1 ratio of 6 percent of qualifying capital.

    The MB said that a breach of the prudential limit requires the bank to explain formally to the BSP why the bank should not merit further remedial action.

    If the BSP deems the explanation as insufficient, the bank shall be instructed to submit, within 30 calendar days from the date of notification, an action plan so that the bank can meet the stress test limit within a reasonable timeframe.

    “The MB is implementing the macro-prudential measure while cognizant of the social agenda of providing shelter as a basic need. It also recognizes the continuing growth of the real estate industry in line with national demographic factors,” the Board said.

    The MB believes that this is an opportune time to introduce such measure so that banks will be appropriately guided by the policy direction.

    “The decision of the MB expands the macro-prudential toolkit used by the BSP in pursuing its prudential objective of fostering financial stability,” the central bank said.

    The BSP noted that using stress tests as a prudential measure is in keeping with the tenets of the international standards set under the Basel Accord.

    “These stress tests are also preferred over absolute limits because they do not prejudice the development of the real estate industry. Instead, banks can have greater exposures to real estate for as long as they manifest their increased ability to absorb these risks vis-à-vis their capital position,” it added.

    BSP data as of end-2013 showed that the real estate exposure (REE) of banks rose by 7.1 percent to P1.006 trillion, compared to the bank’s P939.8 billion exposure in the third quarter of 2013.

    The central bank said that the growth in REE can be attributed to accelerated lending in real estate loans (RELs) which grew by 7 percent to P843 billion at end-2013 from P788 billion a quarter earlier. RELs accounted for 83.8 percent of the banks’ REE last year.


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