The Bangko Sentral ng Pilipinas (BSP) will soon adopt the revised Trust Rating System to further implement regulatory reforms toward an effective risk-focused supervision.
In a statement, the BSP said that in its latest meeting of the Monetary Board, it approved the adoption of the revised Trust Rating System—an assessment tool to comprehensively and uniformly evaluate the administration of fiduciary activities of all trust entities.
“The Trust Rating System is one of the several assessment tools developed to complement BSP’s on-site examination,” it stated.
The Trust Rating System was first adopted in 2008 but there was a need to recalibrate the rating system to remain effective in assessing the risk management practices of trust entities, in light of the evolving sophistication and complexities of fiduciary activities, the BSP noted.
The central bank explained that the revisions include a shift from a 5-point to a 4-point rating scale; incorporation of relevant regulatory issuance after the adoption of the Trust Rating System; integration of the risk assessment framework; and imposition of enforcement actions based on existing regulations.
Moreover, the central bank noted that the revised Trust Rating System takes into consideration key factors essential in the operations of a trust entity, as well as evaluates risk management practices and capability to handle relevant exposures in its fiduciary dealings.
“Under this rating system, the BSP endeavors to ensure that all trust entities are evaluated in a comprehensive and consistent manner, and that proper supervisory attention is focused on those engaging in fiduciary business that are not consistent with sound fiduciary principles,” it said.
On the other hand, the central bank said that trust entities will be assigned a composite rating based on the evaluation and assessment of five essential components of an institution’s fiduciary activities.
The five components are: the capability of board of directors, trust committee and senior management responsible in the administration of fiduciary business; soundness of operations, controls and audits; adequacy of compliance with governing instruments, applicable laws, rules and regulations and sound fiduciary principles; prudent management of fiduciary assets; and earnings performance.
The BSP noted that the composite and component ratings are assigned based on a numerical scale of 1 to 4.
A rating of “4” indicates strongest performance and risk management practices, and the least degree of supervisory concern, while a rating of “1” indicates the weakest performance and risk management practices and, therefore, warrants the highest degree of supervisory attention.
“Although the composite rating bears a close relationship to each component ratings assigned, it is not derived by computing an arithmetic average of the component ratings,” it added.
Similar with the other assessment tools, the BSP also said that it shall assess which areas place the greatest impact on safety and soundness of the trust entity.
Enforcement actions to be imposed on institutions will be based on existing regulations, and are directed to address the underlying causes of the weaknesses/deficiencies and violations of central bank rules and regulations, the BSP mentioned.
The revised Trust Rating System will be adopted in examinations commencing July 1, 2013.