BSP eyes prudential requirements for digital-centric banks

THE BANGKO SENTRAL ng Pilipinas (BSP) is looking to set prudential requirements for “digital-centric” banks as it wants to level the playing field and ensure financial stability.

In a draft circular posted on its website, the central bank is looking to adopt progressive prudential requirements for digital-centric thrift, rural and cooperative banks to “ensure that regulatory standards remain commensurate with (risk exposures).”

“The progressive prudential requirements aim to foster innovation while ensuring the safety and soundness of the banking system,” the BSP said.

“This likewise promotes a level playing field for both incumbents and new entrants as banks navigate the opportunities and challenges brought about by rapid digitalization in the banking sector.”

Under the draft rules, thrift, rural and cooperative banks identified by the BSP as digital-centric will be considered as complex banks.

Complex banks are defined as those entities that use nonconventional business models, such as “using nontraditional delivery platforms such as electronic platforms.”

These banks may also have a business strategy “characterized by risk appetite that is aggressive, and risk exposures which are increasing, such as those with robust branch expansion programs or acquisition plans.” It could also refer to banks with digital-centric operations, it added.

“The BSP shall assess the extent of technology utilization of subject banks as well as the maturity or degree of their digitalization efforts.”

In assessing the level of digital centricity of a bank, the BSP will consider indicators such as capability to offer end-to-end e-KYC (electronic know your customer) and digital deposit funding; capability to digitally offer or service loans; and percentage of customers who avail of digital financial products or services; among others.

The proposed regulations will classify these digital-centric banks into three tiers with each tier representing a progressively higher level of digital centricity.

“Correspondingly, prudential requirements are calibrated to increase with each successive tier, reflecting the heightened complexity, scale, and risk profile of the bank’s digital operations.”

Tier 1 would cover rural or cooperative banks that have obtained an Electronic Payment and Financial Services (EPFS) license to enable the utilization of a mobile banking application and other channels that are capable of onboarding clients via e-KYC facilities and enable customers to fund their deposit accounts digitally.

They must also have at least 30% of its deposit or loan customers onboarded via digital channels; or have at least 30% of its deposits or loans out of their respective balances sourced from digital financial service offerings; or at least 30% of its total financial transactions as EPFS transactions.

This tier could also include rural or cooperative banks engaged in loan channeling arrangements whereby end-user loan clients are largely sourced digitally either by the thrift, rural or cooperative bank or their loan channeling partners.

Meanwhile, Tier 2 would include thrift, rural or cooperative banks that have at least 50% of their customers onboarded through digital channels; or deposits or loans sourced from digital financial service offerings; or their total financial transactions as EPFS transactions.

Banks under Tier 3 would have at least 75% of their customers and deposits or loans through digital channels, financial service offerings, or financial transactions.

Under the draft rules, banks must comply with prudential requirements depending on their tier.

Tier 1 banks would need to have a minimum capital requirement of at least P200 million.

Banks that fall under the Tier 2 category would need a minimum capital requirement of at least P500 million for rural and cooperative banks, while thrift banks’ minimum is set at P600 million.

Meanwhile, Tier 3 banks have a minimum requirement of at least P1 billion.

All three tiers must also ensure compliance with Basel III leverage ratio and other applicable prudential requirements; adopt an electronic anti-money laundering system; and implement automated and real-time fraud monitoring and detection systems.

“Once recognized as digital-centric and the corresponding level of digital centricity specifically identified, the (bank) will be required to provide regular updates or reports,” the BSP said.

These include the banks’ digitalization roadmap, specific plans and strategies related thereto and any manifestation on the extent of its operations that is technology-heavy or digitalized.

“Once a bank is classified under a specific tier, it shall no longer be permitted to adopt the capitalization or risk management requirements applicable to lower tiers, even if its level of digital centricity (i.e., percentage of digital accounts and/or transactions) subsequently declines.”

The BSP may also require banks “to immediately comply with the minimum capital requirements if the bank is observed to be performing excessive risk-taking activities.”

If a bank undergoes the voluntary conversion of an existing thrift, rural or cooperative bank to a digital bank license, they should immediately comply with the minimum capital of P1 billion.

“It shall submit an acceptable transition plan to comply with the other prudential requirements for a period of three years from the approval of the Monetary Board of its conversion to a digital bank.”

The draft rules also detail guidelines in establishing physical touchpoints for domestic banks. — Luisa Maria Jacinta C. Jocson