THE CENTRAL BANK will impose minimum leverage standards on big banks starting July, which will serve as another tool to prevent excessive debt exposures and improve their financial footing.

In a statement yesterday, the Bangko Sentral ng Pilipinas (BSP) said it will enforce the five-percent minimum leverage ratio covering universal and commercial banks starting July 1, mirroring a similar move by international regulators.

The computation of the ratio includes subsidiary and quasi-banks owned by a big bank.

Introduced in June 2015, the five-percent leverage ratio imposes a general standard on how much capital banks should have to cover non-risk weighted assets.

The central bank said the preventive measure is designed to “constrain the potential buildup of leverage in the banking industry and to promote stability of the financial system.”

Once in place, the leverage ratio will boost capital buffers maintained by banks against potential risks, and will complement the 6.0% common equity Tier 1 ratio, the 7.5% Tier 1 ratio, and the 10% capital adequacy ratio (CAR) imposed by the central bank.

The BSP defines the ratio as a backstop measure to mitigate the “excessive” accumulation of assets in the banking system by comparing a bank’s high-quality Tier 1 capital to its total loan exposures.

The five-percent standard to be imposed by the BSP is well above the three-percent minimum set under the Basel 3 regime, much like the domestic CAR which is above the eight-percent global standard.

Included in the computation of the leverage ratio are the reported amounts of accounts on the balance sheet as well as off-balance sheet items like derivatives and securities financing transactions, the central bank said in its statement.

Last year, central bank officials have said that big lenders are generally ready to comply with the five-percent leverage ratio as they remain armed with ample high-quality capital as buffers.

The leverage ratio forms part of an array of risk management measures outlined under the Basel 3 framework that was crafted by international policy makers to prevent a repeat of the 2008 Global Financial Crisis.

At the time, governments had to step in and bail out fallen banks using public money, which consequently triggered widespread recession.

Adoption of Basel reforms is voluntary and can be done gradually by central banks, with the full rollout scheduled by 2019. Last year, the BSP pushed back the adoption of the leverage ratio to 2018, citing revisions made by the Basel Committee on Banking Supervision on this regulatory standard. The global body adopted a simpler model for computing leverage that kicked in this month following a review of the standard. — Melissa Luz T. Lopez

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