By Luz Wendy T. Noble

THE CENTRAL BANK on Wednesday said it would tighten capital requirements on smaller standalone lenders, consistent with international standards that would let these financial institutions continue absorbing losses.

“The enhanced capital standard is aimed at promoting the safety and soundness of individual banks and the banking system,” the Bangko Sentral ng Pilipinas (BSP) said in a statement.

“This reinforces the importance of maintaining sufficient level of common equity which could absorb losses on an ongoing basis,” it added.

The stricter capital requirement was only imposed on big banks and their thrift units before Wednesday’s announcement.

BSP said there would be an observation period until the end of 2021 to make room for a “smooth transition” to the revised capital rules.

Under the new rules approved by the policy-making Monetary Board, standalone thrift, rural and cooperative banks must provide for minimum capital ratios including a common equity tier 1 ratio of 6%, a tier 1 ratio of 7.5% and a capital conservation buffer of 2.5%.

These are on top of the minimum capital adequacy ratio of 10%. Tier 1 capital is largely made up of common equity tier 1 capital elements such as common shares, additional paid-in capital, retained earnings and undivided profits.

Additional tier 1 capital is mostly made up of eligible perpetual capital instruments.

This will put local bank rules at par with international standards under the Basel III requirements, the central bank said.

Smaller banks already have enough funds to comply with the rules and the central bank was just “formalizing” the requirements, BSP Deputy Governor Chuchi G. Fonacier said in an interview.

Banks covered by the revised standards must submit parallel capital adequacy ratio reports using the existing and new frameworks until Dec. 31 next year, BSP said.

The Basel III framework took effect in 2014 to improve banks’ risk management and force them to avoid excessive financial stress, as what happened during the 2008 global financial crisis.

BSP Managing Director Lyn I. Javier said in an interview that the stricter capital rules are part of the second phase of compliance with Basel III standards.

Suzanne I. Felix, executive director of the Chamber of Thrift Banks, said they were confident the industry could meet the requirements.

“Our members are definitely strong enough to meet the requirements,” Ms. Felix said in an emailed reply to questions, citing the industry’s capital adequacy ratio of 17%.

“I don’t think it will affect lending in general, though this may have an impact on banks that are into hybrid instruments,” she said, referring to securities that could qualify for both equity and debt.

Ruben Carlo O. Asuncion, chief economist at UnionBank of the Philippines, Inc. said the reform seeks to strengthen the banking industry as a whole, given that smaller players are “really vulnerable to financial shocks and changes in the system.”

“It would be the most prudent thing to do to help these types of financial institutions weather the challenges of any financial system shocks,” he said in an e-mail.

The changes would also act as a “filtering mechanism” to separate the stronger banks from the weaker ones.

“It can also show which institutions need more help, and which ones can really stand alone,” he said.