BSP lists systemically important banks
Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said they have identified domestic systemically important banks (D-SIBs) but did not disclose how many of these D-SIBs are.
Tetangco however said that the DSIBs list is a changing list and it will be updated on a yearly basis. Based on the guidelines Basel 3, D-SIBs have to keep a higher common equity Tier 1 (CET1) of between 150 and 250 basis points against its risk-weighted assets.
The BSP in a statement said D-SIBs must also maintain “higher supervisory expectations” including Internal Capital Adequacy Assessment Process or ICAAP and “acceptable recovery plans” in case these banks fail to meet capital requirements in the future.
According to Tetangco, the steep D-SIBs capital requirements and supervisory expectations will “serve to strengthen the system” and inspire confidence by “lowering the probability of systemic bank failures”.
“(The D-SIBs guidelines) are pro-active measures to sustain such strength,” said Tetangco. He also emphasized that the higher minimum CET1 threshold “would not be disruptive since (based on) internal simulations (there’s a) reasonable earnings retention program sufficient to bring the capital level of D-SIBs within the required threshold”.
D-SIBs by BSP determination are banks whose “distress or disorderly failure would cause significant disruptions to the wider financial system and economy.”
In an earlier report this year, the BSP did disclose 14 identified D-SIBs of 36 universal and commercial banks. These 14 banks are large enough to be classified as D-SIBs.
Based on a BSP simulation, the report said four of these 14 banks are deemed to have insufficient capital and are compliant with the total CET1 requirement. However four banks have deficient capital and two banks have “just a little above the required” of CET1.
D-SIBs whose capital ratio falls below their corresponding regulatory minimum will be allowed limited distribution of their profits. The BSP will then allot enough period for the “too big to fail” banks to meet the higher capital ratio.
Identifying D-SIBs is part of the BSP’s commitment to the overall monitoring of so-called global systemically important financial institutions or G-SIFIs under Basel 3 regulations which the BSP adopted in January 2014. These SIFIs have higher loss absorbency capacity and additional CET1 requirement which is the highest capital among capital-eligible instruments.
The BSP has to implement initial or phased-in D-SIBs measures by 2017 and a full compliance by 2019 – which by then an increase in CET1 must be complied with but there will be a step-ladder type of implementation.
The BSP yesterday stated that following the framework released in October last year, banks were classified depending on their systemic importance using “pre-defined indicators for size, interconnectedness, substitutability and market reliance as a financial market infrastructure as well as complexity.”