THE BANGKO SENTRAL ng Pilipinas (BSP) has approved a new measure meant to boost banks’ capital to equip them further to weather episodes of financial stress.
In a statement on Thursday, the Monetary Board announced the approval of the countercyclical capital buffer (CCyB) as a new preventive tool to better manage funding risks.
Being “countercyclical” means universal and commercial banks as well as their subsidiaries will have to set aside more funds during boom or growth periods that they can then use amid a funding crunch so that they can keep on lending money.
The CCyB will be on top of the capital adequacy ratio, which requires big lenders to hold on to at least 10% of their risk-weighted assets at all times.
The CCyB is set at a maximum of 2.5%, but starts at zero percent.
This prudential tool is included in the international Basel 3 framework, although the central bank initially decided not to adopt the standard until earlier this year.
Other buffers in place are the common equity tier 1 (CET1) ratio at six percent, the high-quality or tier 1 capital ratio of 7.5%, and the capital conversation buffer also at 2.5%.
The BSP said banks will use their CET1 capital to comply with the CCyB requirement.
The press statement quoted BSP Governor Nestor A. Espenilla, Jr. as saying that the CCyB provides a “steadying hand” amid boom-and-bust cycles.
“During periods of continuing expansion, the CCyB may be raised which has the effect of setting aside capital which can be used if difficult times ensue,” the central bank said.
“During periods of stress, the Monetary Board can lower the CCyB requirement, effectively providing the affected banks with more risk capital to deploy.”
The central bank said that the CCyB’s start at zero percent “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 buffer, however, will be continuously reviewed by the BSP.”
Banks will be given 12 months period to raise funds should the BSP increase the buffer level. On the other hand, a reduction in the CCyB takes effect immediately.
Mr. Espenilla on Dec. 6 signed Circular No. 1024 that provides for the CCyB which takes effect 15 days after publication.
The international Basel 3 framework is a set of preventive measures meant to ensure a solid footing for banks. These guarantee that lenders will not fold, drawing lessons from the 2008 Global Financial Crisis. — Melissa Luz T. Lopez