Risk weights of Philippine sovereign issues denominated in foreign currencies have been reduced by the Bangko Sentral ng Pilipinas (BSP).
In a statement on Thursday, the central bank said that the reduced risk weight cover two risk categories—foreign currency denominated sovereign and the capital charge for interest rate risk on bank holdings.
Credit risk weights for foreign denominated sovereign issues are reduced from 100 percent to 50 percent.
Meanwhile, the capital charge for interest rate risks on bank holdings of foreign currency bonds issued by the government and the BSP is reduced from 8 percent to a range of 0.25 percent to 1.60 percent of these assists, depending on the residual maturity of the debt securities or derivative contract.
According to the BSP, the lower risk weights assets have the effect of making available more funds that may be potentially used for lending and other banking activities.
It added that the reduction in risk weights is a direct result of the credit-rating upgrade of the Philippines into investment grade by two international rating agencies.
“As part of its overall risk management framework, the BSP conservatively raised in July 2007 the risk weights of sovereign issues denominated in foreign currencies,” it said.
Under the same guidelines, the central bank continued that the investment grade ratings recognized the stronger risk standing of the Philippines, which allowed the reduction in risk weights.
Fitch Ratings as well as Standard and Poor’s upgraded the country from BBB- from BB+ category, which brought the country to investment grade.
BSP Governor Amando Tetangco Jr. pointed out that these are the direct gains that accrue with the investment grade rating.
“The impact is not only about the feel-good effects of a lower risk weights, but that there are balance sheet implications to consider as well,” he said.
Furthermore, BSP simulations indicate that about P147.13 billion may effectively be released for loans and other expenses as a result of the upgrade to investment grade.
The same central bank simulations showed that the calibrated risk weights will raise the capital adequacy ratio of universal and commercial banks from 17.28 percent to 17.83 percent using end-2012 banking figures.
The BSP also pointed out that the simulated effects are not insignificant. However, it also reminds that credit underwriting standards need to be sustained if the country are to sustain the benefit of such ratings upgrade.
Mayvelin U. Caraballo