BSP sets stiffer Basel 3 leverage ratio

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The central bank has approved new rules on the leverage ratio of banks in line with the international standards issued by the Basel Committee on Banking Supervision known as the Basel 3 reforms.

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In statement Friday, the Bangko Sentral ng Pilipinas (BSP) said its Monetary Board approved the guidelines for the implementation of the Basel 3 Leverage Ratio in the Philippines.

The policy-making Monetary Board set a minimum ratio of 5 percent compared with the Basel minimum of 3 percent.

The ratio is a measure of up to how much risk banks can leverage in relation to their capital. The formula is similar to that of capital adequacy ratio (CAR), except that CAR measures how much capital a bank has in relation to risk-weighted assets like money lent to clients.

“The leverage ratio under the Basel 3 framework relates the level of a bank’s Tier 1 capital as against its total on-book and off-book exposure,” it said.

The new requirement applies to universal and commercial banks, their subsidiary banks and quasi-banks.

The 5 percent minimum means that the maximum exposure that a bank take on must not exceed 20 time its Tier 1 capital.

Under the Basel 3 reform agenda, the central bank noted the leverage ratio needs to be set alongside the capital adequacy ratio.

“Both ratios relate a measure of capital against an indicator of bank exposure, providing quantitative guidance on the extent of assets that a bank can carry for a given level of capital. The main difference between the two ratios is that the leverage ratio treats both on-book and off-book assets uniformly without adjusting for differences in riskiness,” it said.

The Monetary Board also set a monitoring period up to end-2016, during which banks will not be sanctioned even if they fall below the 5 percent minimum.

Banks are required to submit periodic reports.

“Any adjustments to the guidelines will be issued before the requirement takes full effect on January 01, 2017,” the BSP said.

BSP Governor Amando Tetangco Jr. noted the dangers associated with excessive accumulation of bank assets without corresponding capital support.

He pointed to excessive leverage as one of the triggers of the recent global financial crisis.

“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,” Tetangco said.

The new measure is being implemented consistent with the broader financial stability agenda of the BSP to mitigate the build-up of risks that can have system-wide consequences, the central bank said.

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