Banks remain ‘well-capitalized’ – BSP

Local big banks’ capital adequacy ratio (CAR) on a consolidated basis improved to 15.8 percent at the end of the first quarter compared to end-2016’s 15.1 percent, according to the central bank.

On solo basis, the universal and commercial banks as of end-March had CAR of 15 percent which the Bangko Sentral ng Pilipinas (BSP) said “improved slightly” from the previous quarter’s 14.4 percent.

Solo basis meant CAR of banks’ head office plus branches while consolidated ratio are the credit and market risks of banks that include the parent bank and subsidiary financial businesses but excludes insurance companies.

The latest CAR continues to be “well above the BSP regulatory threshold” of 10 percent and international minimum of eight percent, the BSP said in a report.

The same report noted that the capital health of the Philippine banks on a consolidated basis was more than that of South Korean banks which was 15.4 percent but lower compared to Malaysian banks’ 17 percent, Thai banks and Indonesian banks’ 17.9 percent and 20.6 percent, respectively.

The CAR is a risk-sensitive measure of a bank’s solvency and relates capital to risk assets weighted according to their relative riskiness.

“Banks maintain high levels of CAR amid tighter capital requirements,” said the BSP.

Two years ago, the BSP announced a new Basel 3-related rule to strengthen banks’ liquidity base or the liquidity coverage ratio (LCR) which would complement the minimum capital adequacy implements.

While the CAR cover solvency issues and risks, the LCR imposes a minimum standard to protect banks against liquidity risks which may happen even if a bank is still solvent, said the BSP.

Beginning January 1,

2018, the LCR threshold that banks will be required to meet will be 90 percent which will then be increased to 100 percent from January 1, 2019.

Also in 2015, the BSP announced it was requiring large banks to put up a leverage ratio of at least five percent of Tier 1 capital against risk exposures. The minimum leverage ratio meant that banks can keep maximum exposures of 20x its Tier 1 capital under the Basel 3 framework.

The BSP put the banking system under an observation period of one year or until end-2017 to prepare for the stricter capital requirement. Initial assessment continue to show that banks are setting aside adequate buffers for their risktaking transactions or activities.