New capital buffer to bolster Phl banks

The new risk management measure that requires big banks to set aside additional capital as reserves can be a useful tool in managing systemic risks if calibrated well, according to Fitch Ratings.

The debt watcher said countercyclical capital buffer (CCyB) approved by the Bangko Sentral ng Pilipinas (BSP) this month could be use to slow down over-exuberant credit growth.

“The initial rate has been set at zero, but can be raised if the regulator were to grow more concerned about systemic risks in the face of rapid growth,” Fitch said.

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

“The CCyB is sensitive to the rate of credit growth, which is particularly pertinent for the Philippines as system loan growth has been high over the past several years, leading to the potential build-up of credit risks,” it said.

The compounded annual growth rate in bank lending in the Philippines is roughly 17 percent from 2013 to 2017.

Fitch said any CCyB requirement would be added-on to existing common equity Tier 1 capital requirements pegged between 10 and 11 percent for large banks starting January, including a capital conservation buffer of 2.5 percentage points and additional buffer for domestic systemically important banks of between 1.5 percentage points and 2.5 percentage points.

“The CCyB would give the regulator more flexibility to lift capital requirements for banks if it senses a growing threat to system stability,” it said.

The Philippines was one of the earliest jurisdictions in Asia Pacific to fully implement local Basel III capital rules from 2014, with minimal transition arrangements.

The initial rules, however, did not include a CCyB framework as the regulator preferred to implement more targeted sector-specific macro-prudential measures at the time.

Fitch said the newly announced CCyB rules are a sign of progress on one of BSP’s stated priorities to expand its policy toolkit.

Other macro-prudential measures floated at the time, but not yet finalized, are a debt-to-earnings borrower test and a borrower interconnectedness test, which should help to address corporate leverage and contagion risk, respectively.

Fitch expects credit growth to cool in the coming year as interest rates have risen significantly after the BSP’s Monetary Board jacked up rates by 175 basis points in five-rate setting meetings since May to rein in inflation.

“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 crystallize as borrowing rates rise,” Fitch said.