Higher equity ratio set for systemically important banks

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Banks considered systemically important to the economy will be required to increase their minimum Common Equity Tier 1 (CET1) ratio under the new guidelines issued by the Monetary Board of the central bank.

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“The new regulation is a major initiative which is designed to ensure that our banking industry further builds upon the strength that it has already achieved,” Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said in a
statement issued by the central bank on Tuesday.

The new guidelines will help determine which of the country’s banks are so-called “D-SIBs,” or deemed systemically important to the domestic economy.

In the statement, the central bank explained that D-SIBs are banks whose distress or disorderly failure would cause significant disruptions to the wider financial system and economy.

The increased ratio of minimum CET1 “will be on top of the existing CET1 minimum of 6 percent and the capital conservation buffer of 2.5 percent, the statement said.

“D-SIBs whose capital ratio falls below their corresponding regulatory minimum will be subject to constraints in the distribution of their income,” it said.

Under the framework, banks will be evaluated based on measures for size, interconnectedness, substitutability, financial institution infrastructure and complexity.

The central bank noted that although these measures are largely quantitative, supervisory judgment may also be applied to determine a bank’s systemic importance.

Based on their composite score, each bank will be slotted into one of three “buckets” of systemic importance, it explained.

The requirement to limit the distribution of profits for those D-SIBs whose capital ratios fall below the regulatory minimum should not be interpreted as a “hard penalty,” Tetangco clarified.

“D-SIBs will be given enough time to meet the higher capital ratio but should banks be unable, limiting the distribution of profits is the way for these banks to build up their capital position by re-channeling their profits,” the BSP governor pointed out.

Tetangco added that once the capital ratios are brought back to their required minimum, this restriction would be lifted.

To remove any uncertainty, D-SIBs will also be required to include in their Internal
Capital Adequacy Assessment Process (ICAAP) concrete and reasonable recovery plans which shall be implemented in case the bank breaches the capital requirements. They are also subject to more intensive supervision, the BSP said.

In facilitating the transition into the new rules, the central bank said it will adopt a phased-in approach for the higher CET1 ratio requirement for D-SIBs.

The BSP will inform each bank if they are classified as a D-SIB by mid-2015 (as well as their specific bucket). However, the D-SIB status of a bank will not be publicly announced.

D-SIBs are required to have put the necessary incremental CET1 by January 01, 2019. To provide further guidance, the new BSP regulation sets a step-ladder type threshold for the CET1 of D-SIBs starting January 01, 2017.

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