Foreign bank branches (FBB) that failed to meet the requirements for implementation of Basel III Accord next year will be given a year to comply until January 2015, according to a new framework approved by the Monetary Board (MB).
In a statement, the Bangko Sentral ng Pilipinas (BSP) said that the MB approved the amendments to the capital framework of FBBs operating in the Philippines. Under the new framework, the capital component of FBB that is classified as Tier 1 shall be predominantly composed of permanently assigned capital (PAC).
The BSP explained the concept of PAC was initially introduced by law under Republic Act 7721, or “An Act Liberalizing the Entry and Scope of Operations of Foreign Banks in the Philippines and for Other Purposes.”
On the other hand, the regulation said that FBB accounts which are booked under the “Net Due To” account will now be reclassified as Tier 2 capital. These “Net Due To” accounts typically reflect transactions between the FBB and its parent entity and include placements, investments and borrowings.
“Net Due To” accounts were previously categorized as Tier 1 capital under the older Basel II framework. The new policy is consistent with the intention of the reforms under Basel III to classify as Tier 2 the debt instruments that are deemed eligible as Basel III capital, the central bank noted.
The BSP added that the amendments will align the capital structure of FBBs with the implementation of the Basel III Accord, while further strengthening the capacity of FBBs to absorb risks from their operations in the Philippines.
The central bank explained that the Basel III framework—that will take effect on January 1, 2014—will also apply to FBBs since these branches operate locally under either a universal or commercial bank license.
The regulation said that FBBs must meet all the prescribed minimum ratios which include a 6-percent Common Equity Tier 1 (CET1) ratio, a 7.5-percent Tier 1 ratio and 2.5-percent capital conservation buffer which can only be met by CET1-eligible instruments. FBBs common equity is represented by PAC.
The FBBs which do not meet the prescribed minimum capital ratios on January 1, 2014, will be given a year or up to January 1, 2015 to comply, the regulation added.
However, the new regulation is requiring the FBBs to submit a capital build up plan to the BSP by April 1, 2014.
The MB said that the capital build up plan does not only reflect how these FBBs intend to meet the new prudential thresholds, but also the necessary approvals from their parent entity.
“This new initiative strengthens foreign bank branches in the Philippines because they will have their capital onshore when they take on onshore risks,” said BSP Governor Amando Tetangco Jr.
He added that this is the “prudent policy direction since it will reduce unwarranted reliance of foreign bank branches on their parent entity for capital support when operating domestically.”