BSP revises capital calculation method for banks

THE BANGKO Sentral ng Pilipinas (BSP) said it has modified the calculation method for capital held by banks to better reflect holdings of higher-quality instruments.
Circular No. 1027 published on Friday amended the definition of capital under the Manual of Regulations for Banks as well as the Manual of Regulations for Non-Bank Financial Institutions.
The BSP defines capital as the “total of the unimpaired paid-in capital, surplus, and undivided profits,” and that it is synonymous to unimpaired capital and surplus, combined capital accounts, and net worth.
The bank said deposits for stock subscriptions recognized as equity shall be added to capital.
The following shall also be deducted from capital: Treasury stock; unbooked allowances for probable losses — including allowances for credit losses and impairment losses — and other capital adjustments as may be required by the central bank; total outstanding unsecured credit accommodations, both direct and indirect, to directors, officers, stockholders, and their interest granted by the bank proper; total outstanding unsecured loans, other credit accommodations and guarantees granted to subsidiaries; total outstanding loans, other credit accommodations and guarantees granted to related parties that are not at arm’s-length terms as determined by the BSP.
Also included in the deductions from capital are: deferred tax assets that rely on future profitability of the bank to be realized, net of any allowance for impairment and associated deferred tax liability — provided that the excess cannot be added to net worth if the resulting figure is a net deferred tax liability; reciprocal investment in equity of other banks/enterprises, whether foreign or domestic, whichever is lower of the investment of the bank or the reciprocal investment of the other bank or enterprise; and the government counterpart equity in the case of rural and cooperative banks except those arising from the conversion of arrearages under the BSP rehabilitation program.
The BSP said that the new circular will “ensure that capital is only composed of instruments that are of highest quality to absorb losses.”
“Prior to said issuance, the composition of accounts considered as capital for purposes of determining net worth and the capital adequacy ratio (CAR) slightly differ. On the one hand, net worth is being used to determine compliance with minimum capital levels as prescribed under Circular No. 854,” Deputy Governor Chuchi G. Fonacier said on Friday via text.
“On the other hand, CAR is a more risk-sensitive measure of a bank’s solvency position that is expressed as a percentage of qualifying capital to risk-weighted assets. CAR is aligned with international standards on capital measurement. The issued guidelines align, to the extent possible, the composition of capital accounts for purposes of determining net worth with that being used for determining CAR,” she added.
Based on the BSP’s Manual of Regulations for Banks, lenders are required to have a minimum capitalization depending on the number of branches and their location. Universal banks have a P3 to 20 billion minimum capitalization requirement; commercial banks P2 to 15 billion; thrift banks P200 million to P2 billion; and rural and cooperative banks P10 to P200 million
Quasi-banks meanwhile are required to have a minimum capital of P300 million, and trust corporations P100 million.
The risk-based capital adequacy framework sets minimum capital ratios of 6% on the Common Equity Tier 1 (CET1) ratio, 7.5% on the Tier 1 ratio and 10.0% on the Total Capital Adequacy Ratio (CAR). — Elijah Joseph C. Tubayan