October 23, 2014

BSP to set new capital guidelines for “too big to fail” banks

The central bank ( BSP) is reportedly looking to impose stricter capital requirements for domestic systematically important banks (DSIBs). The new guidelines will be in line with Basel 3 standards, which were formed in response to the 2008 global financial crisis. DSIBs are banks which are deemed too big and too important, and those whose failures may have significant negative effects on the financial system and the economy. Local banks will be assessed via their size, interconnectedness, financial institution infrastructure and complexity.

Based on these criteria, banks will be ranked and classified into three buckets of systematic importance. DSIBs will need to beef up their common equity tier 1 (CET1) ratio by 1.5% to 3.5%. This will be on top of the existing CET1 minimum of 6% and a capital conservation buffer of 2.5%. The capital conservation buffer is another requirement of Basel 3 that will later on be imposed by the BSP.

Banks should meet the prescribed capital ratios along with the conservation buffer to avoid restrictions in their dividend payments. Based on news reports, the BSP will ask DSIBs to meet the new capital ratios by 2019 and that a step-ladder type threshold will be used for the DSIBs’ CET1 ratios starting 2017.

Our take: These reforms are part of the Basel 3 accord but will be implemented at later dates and have been already communicated to local banks ahead of time. Hence, local banks have been able to plan their capital-raising activities in consideration of these prospective additional capital requirements.

If these benchmarks were imposed now, the three biggest DSIBs would have to meet a CET1 threshold of 12% in order to meet the Basel 3’s basic CET1 requirement, the DSIB capital charge and the conservation buffer.

Offhand, Bank of the Phil. Islands (BPI), BDO Unibank (BDO) and Metrobank (MBT) would meet the 12% CET1 threshold if the additional capital requirements were to be imposed now. As of 2Q14, BPI, BDO and MBT had CET1 ratios of 14.5%, 13.1% and 12.1%, respectively. Moving forward, these banks’ prospective earnings can further expand their capital bases via an increase in retained earnings, allowing them to better plan their capital management activities with reference to these additional capital requirements. – WealthSec