Stress tests not meant to restrict real estate lending, BSP clarifies

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The central bank clarified that it is not restricting banks’ real estate lending with the issuance of a directive requiring banks to undergo stress tests on their property loan portfolios, emphasizing that the overall situation in the property sector remains manageable.

According to the central bank, the pre-emptive macro-prudential policy measure announced last week was only meant to ensure that banks are well capitalized to absorb any “stressed conditions” that may arise within the sector.

Under the new measure, banks will undergo stress tests to determine whether their capital levels are sufficient to absorb the credit risk to real estate.

Universal, commercial (U/KBs) and thrift banks must meet a capital adequacy ratio (CAR) of 10 percent of qualifying capital after adjusting for the stress test results, while U/KBs as well as their thrift bank subsidiaries will be required to maintain a level of Common Equity Tier 1 (CET1) that is at least 6 percent of qualifying capital after factoring in the stress scenario.


Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said that the stress test thresholds—both the 10 percent CAR and 6 percent CET1—are new measures and meant to emphasize that banks must have enough capital to absorb “stressed conditions.”

“The original stress tests cover scenarios for credit losses [by economic activity, consumer finance, by counterparty], market price movements [local and foreign interest rates, USD/PHP exchange rate]and liquidity [tenor buckets]. This new set is geared specifically for the banks’ real estate exposure,” Tetangco explained in an e-mail to reporters over the weekend.

The BSP governor cited, for example, other jurisdictions which have chosen to regulate their exposure to real estate either with absolute limits, lower loan-to-value ratios and/or higher taxes, among others.

However, Tetangco said that the central bank believes that there is a need to strike a balance between supporting the social agenda for housing and shelter on the one hand, and the prudential oversight over bank exposures on the other.

“With this new guideline, the BSP is not saying that banks should not engage in housing credits/exposures. Instead, we are saying that banks must have enough capital to absorb losses under stressed market conditions,” he said.

“Therefore, if a bank chooses to increase further its real estate exposure, that will be okay with the BSP for as long as the bank is ‘well-capitalized,’ the latter concept being defined as levels sufficient enough to cover stressed conditions,” he added.

Tetangco also assured that the overall situation in the property sector remains manageable. However, some banks may be increasingly more exposed in the sector, but the new measure is aimed at such banks so they can control their vulnerability.

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