BSP now requires banks to boost reserves to cope with credit spike

The Bangko Sentral ng Pilipinas (BSP) has introduced a new risk management measure that would require big banks to set aside additional capital as reserves to protect the banking sector from periods of excess aggregate credit growth.

BSP Governor Nestor Espenilla Jr. has issued Circular 1024 regarding the adoption of the countercyclical capital buffer (CCyB) using the common equity tier 1 (CET1) capital by universal and commercial banks as well as their subsidiary banks and quasi-banks.

“The CCyB expands our toolkit for systemic risk management and is specifically designed to provide a steadying hand to counter the common occurrence of boomand-bust periods within the financial cycle,” Espenilla said.

The CCyB is set initially at a buffer of zero percent, but should not exceed 2.5 percent in line with global practice.

It also suggests that the Monetary Board does not see the ongoing build-up of credit as an imminent risk that would otherwise require an increase in the capital position of banks.

The regulator, however, will continu- ously review the buffer.

The central bank would give big banks a lead time of 12 months in the event the CCyB buffer is raised during periods of continued expansion.

However, a reduction of the capital buffer would take effect immediately once reduced during periods of stress.

“The CCyB is part of our macroprudential measures that can help guide the path of future credit growth, but is flexible enough to potentially provide immediate effects to address market tightness. This is why it is important to have the CCyB framework in place,” Espenilla said.

The adoption of the CCyB into the regulatory framework reflects the efforts of the BSP to continuously monitor and mitigate the build-up of systemic risks and it is in line with the policy objective of pursuing financial stability.

The risk-based capital ratio of a bank, expressed as a percentage of qualifying capital to risk-weighted assets, shall not be less than 10 percent for both solo basis (head office plus branches) and consolidated basis (parent bank plus subsidiary financial allied undertakings, but excluding insurance companies).