Banks worried about ‘triggers’
Systemic risks
The central bank’s plan to release another crisis intervention tool this year may not happen after the banking community expressed additional worries on the systemic risk “triggers” that would set it in motion.
Bangko Sentral ng Pilipinas (BSP) Deputy Governor Chuchi G. Fonacier said they have gathered comments from the industry and based on what they have, banks seem to be too concerned on what would precipitate the systemic risk tool called the countercyclical capital buffer (CCyB). These concerns will delay its implementation.
Fonacier said they are currently evaluating how they could address issues presented to the BSP by the banks. “(They are) concerned about the triggers for it to be imposed. They want clear triggers and that’s what we are still trying to refine right now,” she said.
Banks can comply with the CCyB using Common Equity Tier (CET) 1 set initially at zero percent. As explained by the BSP, the buffer will not have any “cost consequence” to the banks as far as raising the minimum required CET 1. However, this requirement provides “a trigger that can be instigated in the future should market conditions warrant.”
CCyB is a component of the Basel III Framework, and its objective is to ensure that the banking sector in aggregate has enough capital on hand to help maintain the flow of credit in the economy without its solvency being questioned when the broader financial system experiences said BSP Assistant Governor Johnny Noe E. Ravalo.
Banks have a lot of CCyB-related worries, said Ravalo. “We’re processing it (but) we really need this in the general context of market development. So, we’re always trying to see what’s out there (as possible threats).”
He said the BSP is still consolidating comments and he doubts they could elevate proposed guidelines to the Monetary Board this year.
BSP Governor Nestor A. Espenilla Jr. said the CCyB and other credit crisis-related toolkit, is an intervention measure that the BSP has to put up now when the banking system is in a strong position.
“We’re setting these tools while there’s no ‘stressed’ system, so we are ahead,” said Espenilla, adding that it will be more difficult to set this up when the financial system has been compromised. Espenilla said they want the three intervention tools – the CCyB, the Debtto-Earnings-of-Borrowers’ Test (DEBT) and Borrowers Interconnectedness Index approved as soon as possible. “The plan is to get CCyB and the DEBT approved (soon),” he said.
The CCyB is for “stressed time” while the Capital Conservation Buffer approved in 2014 is for normal time. “With the CCyB, the credit market is meant to be prevented from drying up during not-so-good times while also providing a means to curb credit growth if it is deemed as expanding at ‘too-strong’ a pace,” according to a BSP report.
As a systemic risk tool, it primarily focuses on the pace of credit growth and it can be used to “counter the amplifying effects of the typical self-reinforcing behavior of curtailing credit during difficult market conditions (thus, furthering the weak market) or aggressively extending credit beyond economic fundamentals (and leading to a market bubble),” said the BSP.
According to the International Monetary Fund, the BSP’s plan to introduce CCyB for banks will help to “close data gaps on nonbank financial institutions and conglomerates”
The ASEAN+3 Macroeconomic Research Office or AMRO recently said that this macrofinancial surveillance tool is a “pre-emptive move to safeguard the economy’s financial stability” and the collective efforts across agencies to collect information on corporate and household borrowers are very important and necessary for effective surveillance.