Banks seen to meet leverage standards

By Melissa Luz T. Lopez,
Senior Reporter

PHILIPPINE BANKS are broadly expected to meet minimum leverage standards set by the Bangko Sentral ng Pilipinas (BSP), its chief said, with lenders well-armed with capital buffers to maintain their sound positions.

On Monday, the central bank announced that it will implement the five-percent minimum leverage ratio covering universal and commercial banks by July, representing how much capital banks should have on hand to cover non-risk weighted assets.

The computation of the ratio includes subsidiary and quasi-banks owned by a big lender, which prevents excessive debt exposures which could trigger a funding crunch during times of financial stress.

“Today, the leverage ratio of practically all banks is well above five percent. There’s lot of room because the system is well-capitalized,” BSP Governor Nestor A. Espenilla, Jr. told reporters on Tuesday.

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.

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, including derivatives and securities financing transactions, the central bank said.

Once in place, the leverage ratio will boost capital buffers maintained by banks against potential risks, and will complement the 6% common equity Tier 1 ratio, the 7.5% Tier 1 ratio, and the 10% capital adequacy ratio (CAR).

The 5% standard is higher than the 3% minimum set under the international Basel 3 framework, like how the CAR is also above the 8% global standard.

“Generally, the approach of the BSP is we don’t set a standard if it’s not met at this time,” Mr. Espenilla said in explaining the timing of the new standard.

The liquidity coverage ratio (LCR) will also be implemented starting this year, another measure which will improve risk management among banks.

“The LCR is a powerful macroprudential tool. It requires banks to not just have capital but have enough assets in liquid form. That means it will lower the room for creating risk assets like loans,” Mr. Espenilla added.

The standard requires big banks to hold high-quality and easily convertible assets to cover its total net cash outflows for a 30-day period. Banks are expected to hold assets that will cover 90% of their monthly cash outflows this year, which will go up to 100% by 2019.

Both measures form part of the Basel 3 regime, which was crafted by international policy makers to improve risk management and prevent a repeat of the 2008 Global Financial Crisis. Excessive lending led to massive credit defaults, which then triggered the collapse of big banks and caused widespread recession worldwide.

Several economists have flagged overheating concerns for the Philippine economy as credit growth pushes at a double-digit pace, although central bank officials have said that this should not ring alarm bells just yet as lending has been diversified and productive.

BASIC ACCOUNTS
The central bank has also approved basic deposit accounts as a new banking product, which is expected to bring more Filipinos to use formal financial channels for their transactions.

Mr. Espenilla said the Monetary Board approved last week the creation of “no-frills” basic bank accounts, which will impose no maintaining balances and allow banks to accept new depositors with minimal documentary requirements.

Through this, anyone can open a basic account with a minimum deposit of P100. The account will be accessed for payments, remittances and fund transfers up to a maximum balance of P50,000 without being imposed reserve requirements.

This will complement the “branch-lite” units approved by the BSP in December, which allows lenders to set up dressed-down branches in town centers and even wet markets in order to bring their services closer to the public.

Both measures are expected to help improve financial inclusion, after a recent central bank survey showed that 571 towns and cities in the Philippines — about a third of the total — remain unbanked as of June 2017.

Getting more Filipinos aboard the banking channel also augurs well for the central bank’s goal of raising the share of electronic payments to 20% by 2020 by encouraging digital banking platforms.

Last Thursday, the Monetary Board officially recognized the Philippine Payments Management, Inc. as the industry-led management body for two automated clearing houses for digital transactions which are expected to go live this year.

The faster deployment and access to money is seen to spur increased economic activity, the central bank said.