The Bangko Sentral ng Pilipinas (BSP) is gearing up for the Basel 3 Capital Framework, according to its highest-ranking official.
In recent speech, BSP Governor Amando Tetangco Jr. said that the central bank’s minimum capital adequacy ratio (CAR) remained at 10 percent, however, what has changed is the composition of qualifying capital.
“From a requirement of minimum Tier 1 of 5 percent under Basel 2, we will now be requiring at least 6 percent of Common Equity Tier 1 [CET1]. The minimum Tier 1 shall now be 7.5 percent . . . we will also be requiring a 2.5-percent Capital Conservation Buffer, all of which must be CET1,” he added.
He said that the change in the composition of capital is meant to improve the central bank’s loss absorbing capacity.
Basel 3 introduces a complex package of reforms designed to improve the ability of bank capital to absorb losses, extend the coverage of financial risks, and have stronger firewalls against periods of stress.
“I have been asked why we appear to be in a hurry to implement Basel 3. It’s true we are ahead of the Basel timeframe of 2019, but we are actually behind our Emeap counterparts . . . Are we being stricter than other jurisdictions? Not really, when you consider that our minimum CAR remains at 10 percent,” Tetangco said, referring to East Asia Pacific Central Banks.
The BSP governor noted that among the benefits of implementing Basel 3 now than later is to reduce the regulatory uncertainty and minimize impact on banks, because banks are ready. The move is also credit positive.
He also said that the other major reforms will fall under Liquidity Standards and Systemic Risk and Interconnectedness.
“Experience has taught us that when it is crunch time, often what becomes the binding constraint is liquidity. Bank failures often result from a lack of liquidity. Moreover, this crisis has taught us that looking at individual firms is not sufficient. Interconnectedness is at times even more important,” Tetangco stated.