Banks build up capital buffers ahead of leverage ratio rollout

PHILIPPINE BANKS are generally ready to comply with the leverage ratio standard even as of end-2016, even as the central bank has pushed back its implementation to next year, according to preliminary estimates from the Bangko Sentral ng Pilipinas (BSP).

The BSP defines the leverage ratio as a “backstop measure” that limits the buildup of leverage — or the excessive accumulation of assets — in the banking system.

Initial reports from local banks showed that the lenders are able to set aside between 7.42% and 8.43% on solo basis, well above the 5% leverage ratio standard set by the BSP. The figure is also higher than the 3% international requirement under the Basel 3 framework.

The ratio compares a bank’s high-quality Tier 1 capital to its total exposures. On a consolidated basis, the banks can allot as much as 8.18-9.08% as buffers for the buildup of credit lines.

Keeping these buffers would limit overexposure for banks that could potentially “destabilize” the financial system and the domestic economy, the central bank said in its status report on the financial system as of end-2016.

The central bank announced in January that they are pushing back the full adoption of the leverage ratio to 2018, citing revisions being made by the Basel Committee on Banking Supervision on this regulatory standard.

READY TO COMPLY

Despite the delayed timetable for adoption, the BSP sees Philippine banks able to comply with the new regulatory measure.

The leverage ratio comes in the context of an array of preventive measures outlined under the Basel 3 framework, which was crafted by international policy makers to prevent a repeat of the 2008 Global Financial Crisis. At the time, governments had to step in and bail out fallen banks using public money, which consequently triggered widespread recession.

The adoption of Basel reforms is voluntary and can be done gradually by central banks, with the full rollout scheduled by 2019.

Other measures under the Basel 3 regime include the 10% capital adequacy ratio already imposed by the central bank, which is also above the 8% international minimum; the framework for domestic systemically important banks; the 30-day liquidity coverage ratio; and the net stable funding ratio.

Fitch Ratings has said in a report earlier this month that the Philippines has been “largely compliant” in imposing various banking reforms, and pointed out that local regulators have taken a “more prudent” approach in assessing credit risk.