BSP slaps new leverage ratio on big banks

Under Basel 3

The Bangko Sentral ng Pilipinas (BSP) is 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. Tier 1 ratios are composed of common equity and qualified capital instruments.

The BSP said it will monitor banks’ compliance until 2016 and if some banks were found to have failed at maintaining the minimum five percent leverage ratio, they will not face sanctions. "However, covered institutions are required to submit periodic reports," said the BSP.

BSP Governor Amando M. Tetangco Jr. yesterday noted the “dangers” linked with what he called “excessive accumulation” of bank assets without the corresponding capital support.

Tetangco said it is excessive leverage that led to the recent global financial crisis.

“A careful evaluation of both the CAR (capital adequacy ratio) and the leverage ratio provides the BSP and the banks themselves with a good picture of the extent of risks each bank carries in relation to the capital that could cover for those risks,” explained Tetangco.

Leverage ratio, under Basel 3, is implemented alongside the CAR. The central bank said both ratios measure capital against exposures and provides quantitative guidance on allowable assets against capital. “The main difference between the two ratios is that the leverage ratio treats both on-book and offbook assets uniformly without adjusting for differences in risks,” said the BSP.

As of end 2014, the BSP reported big banks’ CAR of 16.19 percent on consolidated basis which was lower than 16.99 percent in the previous quarter. On solo basis, the large lenders’ CAR stood at 15.23 percent as of end-December, also lower from endSeptember 2014’s 16.32 percent.

The Tier 1 ratio was at 12.74 percent and 13.75 percent on solo and consolidated bases as of end-2014.