Fitch cites effective tool at BSP’s disposal versus rapid credit growth

Credit watcher Fitch Ratings said the central bank’s new rules on the Basel III countercyclical capital buffer (CCyB) framework will be useful as a policy tool to curb any excessive or rapid credit growth in the future.

“The CCyB would give the regulator (the Bangko Sentral ng Pilipinas or BSP) more flexibility to lift capital requirements for banks if it senses a growing threat to system stability,” said Fitch in a statement.

The CCyB, based on BSP Circular No. 1024, is set at zero percent and subject to upward adjustment to a rate that will be determined by the Monetary Board of the central bank when systemic conditions warrant but not to exceed to 2.5 percent.

BSP Governor Nestor A. Espenilla Jr. has said that since the CCyB is initially set at zero percent, this suggests that they do not see any “ongoing buildup of credit as an imminent risk that would otherwise require an increase in the capital position of banks.” What it does now is that is it expands the BSP’s toolkit for systemic risk management and “to counter the common occurrence of boom-and-bust periods within the financial cycle.”

According to Fitch, “the question is at what point the CCyB rate will be increased. Uncertainty on the CCyB trigger had been raised as recently as last month by the banks, and was seen as a potential hiccup in the implementation of the framework.”

Fitch noted that while credit growth has been roughly twice nominal GDP growth in the past few years, interest rates have risen significantly by about 175 basis points within a fairly short time in the second half this year, and “Fitch already expects this to cool credit growth in the coming year.”

“Imposing an additional CCyB requirement at this stage - which the regulator has not done - would likely weigh on loan growth further, running the risk of compounding any credit risks that may crystallise as borrowing rates rise,” it added.

Fitch said the CCyB rate “will add to the hurdle for dividend payment by banks, and raise the trigger point for D-SIB (domestically systemic important banks) recovery plans.” Although Fitch-rated commercial banks' Common Equity Tier 1 (CET1) ratios of between 12.3-16.1 percent as of end-September is still considered adequate buffers and enough for loss absorption, it said.