THE central bank is now allowing financial firms to tap their Basel III-mandated capital and liquidity buffers to mitigate the impact of the coronavirus disease 2019 (COVID-19) pandemic.

“A covered bank/quasi-bank (QB) which has built up its capital conservation buffer (CCB) and Liquidity Coverage Ratio (LCR) buffer is allowed to utilize the same during this state of health emergency,” the central bank said in Memorandum No. M-2020-039 signed by Bangko Sentral ng Pilipinas (BSP) Deputy Governor Chuchi G. Fonacier on May 4.

“[T]he BSP encourages a covered bank/QB to act along this principle for purposes of absorbing losses and supporting the financing requirements of the overall economy,” the BSP said. “In view of this, a covered bank/QB is expected to integrate these regulatory flexibilities into its internal policies and processes to ensure that the buffers are efficiently utilized, as necessary.”

The memorandum said banks will be given a “reasonable time period” to restore their capital positions to meet Basel III requirements after the crisis.

The Basel III framework contains measures that aim to improve banks’ risk management so they can withstand excessive financial stress. These came in the aftermath of the 2008 Global Financial Crisis.

Universal and commercial banks have been required to comply with standards under the Basel III framework as adopted by the BSP since 2014. In February, the BSP likewise imposed on standalone thrift and rural banks the Basel III requirements on capital adequacy.

The BSP requires banks to have a minimum CCB of 2.5% and LCR — which mandates big banks to hold high-quality, easily convertible assets to cover potential net cash outflows over a 30-day period — of 100%.

Meanwhile, lenders are also required to have a minimum capital adequacy ratio of 10% and a common equity Tier 1 (CET1) ratio of 7.5%, higher than the 8% and the 4.5% set under the Basel III framework. Banks are likewise mandated to maintain a net stable funding ratio (NSFR) — a measure of the ability of a bank to fund its liquidity needs over one year — of 100% on both solo and consolidated bases, as well as a countercyclical capital buffer set at a maximum of 0% to 2.5%.

The BSP memo said given the current situation, lenders that will draw down their minimum CCB requirement “will not be considered in breach of the Basel III risk-based capital adequacy framework.”

The CCB is computed in excess of the minimum CET1 ratio requirement of 6%.

“A covered bank/QB that utilizes its capital conservation buffer is restricted from making distributions in the form of dividends, profit remittance in the case of a foreign bank branch, share buybacks, discretionary payments on other Tier 1 capital instruments, or discretionary bonus payments to staff…,” the memorandum said.

The memorandum said the BSP is likewise relaxing the need to maintain a minimum LCR of 100% to allow banks to draw from their stock of liquid assets to meet demand for cash amid the current situation.

“A covered bank/QB may draw on its stock of liquid assets to meet liquidity demands to respond to the current circumstances, even if this may cause the covered bank/QB to maintain an LCR that is below the 100 percent minimum requirement,” it said.

“A covered bank/QB that has recorded a shortfall in the stock of its High-Quality Liquid Assets for three banking days within any two-week rolling calendar period, thereby causing the LCR to fall below the 100 percent must notify the BSP of such a breach on the banking day immediately following the occurrence of the third liquidity shortfall.”

Banks that will not be able to comply with other Basel III risk-based capital adequacy ratios and the minimum 100% NSFR due to the pandemic will be handled on a case-by-case basis, according to the BSP memo.

“A covered bank/QB will be provided by the BSP with enough time to address regulatory breaches taking into account a forward-looking assessment of macroeconomic and financial conditions of the system as a whole and their potential impact on the supervised institution,” the central bank said.

This follows earlier regulatory relief measures which include the imposition of a higher single borrower’s limit of 30% from the original 25% until September, the relaxation of maximum penalty impositions for reserve deficiencies, allowing banks to book credit losses in a staggered manner and the non-recognition of certain defaulted accounts as past due, among others.

UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said this latest initiative is a welcome relief for banks that are already feeling the impact of COVID-19 on their operations.

“It will help banks in absorbing capital shocks due to COVID-19’s economic disruption and the liquidity measure will help financial institutions with their unusual liquidity requirements during this pandemic,” Mr. Asuncion said in an e-mail.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said these buffers were specifically designed to be tapped during challenging economic conditions, which the ongoing COVID-19 outbreak falls under.

“The use of these capital and economic buffers gives banks greater leeway in extending great assistance such as more credit to their respective clients, both retail and corporate,” Mr. Ricafort said. — L.W.T. Noble