BSP to require trust companies to have reserves
TRUST COMPANIES will soon be required to maintain reserves for credit losses, as the central bank imposes new standards on financial firms.
In a statement, the Bangko Sentral ng Pilipinas (BSP) said they will adopt the Philippine Financial Reporting Standards (PFRS) 9 for financial instruments under the watch of trust entities (TE), as they look to tighten management standards.
A trust company acts as a wealth manager for a number of investors who are looking to generate profit from their funds.
Among the major changes required by the central bank are the classification and management as well as impairment of financial assets managed by trust firms, as provided under Circular 1023 signed by BSP Governor Nestor A. Espenilla, Jr.
“[I]n line with the PFRS 9 requirement on the adoption of the expected credit loss in recognizing impairment, the TE shall be required to promptly recognize and maintain adequate allowance for credit losses at all times,” the central bank said in a statement on Tuesday.
Banks have been setting aside loan loss reserves to potentially cover for defaulting clients or investors. Trust companies with basic operations can use simple methods to quantify and set aside funds for expected credit losses, but those with more complex business models have to follow a more sophisticated approach.
The board of directors of TEs must also “approve the business models” which they will follow in terms of managing investment portfolios of clients.
“The classification of financial assets for each client shall be aligned with the business models to be determined by the TE,” the BSP said. “For this purpose, the TE may use industry guidelines as reference in the mapping of investment objectives to the corresponding business models to be approved by the board of directors.”
The PFRS 9 is the local version of the International Financial Reporting Standards 9, which took effect January this year. •