The Monetary Board (MB) has approved the implementing guidelines for the January 1, 2014 adoption of the revised capital standards under the Basel 3 Accord for universal and commercial banks (U/KBs) in the Philippines.

Bangko Sentral ng Pilipinas (BSP) Gov. and MB Chairman Amando Tetangco Jr. said on Wednesday that, “The transition to the Basel 3 standards is an important step toward further strengthening the banking system.”

The guidelines set new regulatory ratios related to bank capital.

“Banks must now meet specific minimum thresholds for so-called Common Equity Tier 1 [CET1] capital and Tier 1 [T1] capital in addition to the Capital Adequacy Ratio [CAR],” he added.

The new guidelines aim to strengthen the instruments that will qualify as “bank capital” to ensure better the ability of U/KBs to absorb losses; introduce buffers that will absorb losses in times of stress (conservation buffer) and across the business cycle (countercyclical buffer); introduce a new global standard on liquidity risk management; allow a non-risk weighted leverage ratio to complement the usual CAR; mandate better transparency of prices (trading of derivatives) and secondary market movements (securitization and re-securitization) and set standards for systemically important financial institutions.

Tetangco said that the regulatory thresholds effectively move banks worldwide to rely more on core capital instruments like CET1 and T1 issues. This is in lieu of hybrid instruments which did not fare well in the latest global crisis as far as absorbing losses is concerned. The ability to absorb losses is central to Basel 3.

The BSP maintained the minimum CAR at 10 percent. In addition to CAR, the new framework sets a CET1 ratio of at least 6 percent and the Tier I capital ratio was set at a minimum of 7.5 percent.

”The new guidelines also introduce a capital conservation buffer of 2.5 percent, which shall be made up of CET1 capital. In addition, banks which issued capital instruments from 2011 will be allowed to count these instruments as Basel 3-eligible until end-2015,” Tetangco noted.

He said that the central bank sees a generally smooth transition to the new standards, with the capitalization of banks operating in the Philippines traditionally set above the international and regulatory minimum. At end-March 2012, the U/KB industry’s CAR averaged 16.85 percent on solo and 18.01 percent on consolidated basis, with Tier 1 at about 14 percent.

”The BSP has been in discussion with the banking industry on the Basel 2 guidelines for some time. By allowing the new guidelines to take effect on January 1, 2014, the BSP expects a smooth transition among universal and commercial banks which are all covered by the guidelines,” Tetangco added.

Basel 3 is a set of reforms introduced in December 2010 by the Basel Committee on Banking Supervision. The standards include strengthening the definition of regulatory capital and the introduction of capital buffers to withstand economic and financial stress.