November 11, 2014

BSP to prepare implementation of minimum leverage ratio

BusinessWorld today reported that the BSP is preparing to implement a minimum leverage ratio for local banks. The ratio will measure how much capital a bank has vs. its total assets.

This differs from the existing Basel 3 ratios, which use risk-weighted assets as the denominator. A BSP official was quoted as saying that the leverage ratio will serve as a supplement to the risk-based capital adequacy ratios that are currently being monitored. While the Basel 3 accord calls for a 3% requirement, the BSP was said to be looking at imposing a 5% minimum leverage ratio requirement. The BSP governor was also quoted as saying that based on initial runs, the average leverage ratio of universal and commercial banks is above 5%. ASEAN countries such as Singapore, Malaysia, Indonesia and Thailand reportedly will set the minimum ratio at 3%.

Our take: It remains to be seen how the BSP will implement this rule. For one, the draft is still being circulated among the local banks. Also crucial to the implementation are the actual minimum leverage threshold that will be set and the definition of capital that will be used.

Though the leverage ratio will be a simpler and more straightforward benchmark, we believe that the Basel 3 capital ratios will still be used as the primary measure of capital adequacy. Thus, we expect the minimum leverage ratio to consider the growth trajectory of the banking sector and will be calibrated with the existing regulatory capital requirements of Basel 3. – WealthSec