Tougher rules set for big banks

MANILA, Philippines - The Bangko Sentral ng Pilipinas released yesterday stricter guidelines for the “too big to fail” or “domestic systemically important banks” (DSIB) to strengthen the industry and avoid contagion in times of crises.

In a statement, the BSP said the Monetary Board approved the guidelines in line with the tougher Basel 3 standards, which were formed in response to the 2008 global financial crisis.

“Global reforms on the treatment of systemically important financial institutions have been initiated in light of the socio-economic costs arising from the financial crisis. This includes the government bailout of failed financial institutions particularly in advanced economies,” the BSP said.

“In an effort to strengthen financial markets and remove the moral hazard of publicly-funded bailouts, the Basel 3 reform agenda requires systemic financial institutions to set aside more funds as buffer for potential losses,” it said.

DSIBs are banks which failure would significantly impact the financial system and the economy as well.

Local banks will be assessed via their size, interconnectedness, substitutability or financial institution infrastructure, and complexity. The BSP said that based on a composite score, the banks will be put into one of the three “buckets” of systemic importance.

The systemically important banks will need to beef up their minimum common equity tier 1 ratio by 1.5 to 3.5 percent based on what bucket they are in. The tougher requirement is on top of the existing CET1 minimum of six percent and a capital conservation buffer of 2.5 percent.

“(The) new regulation is a major initiative which is designed to ensure that our banking industry further builds upon the strength that is has already achieved,” BSP Governor Amando M. Tetangco Jr. said.

The DSIBs that will fail to meet these new rules will be subject to constraints in the distribution of their income. Tetangco said banks should not interpret this as a “hard penalty” as DSIB will be given time to comply with the higher capital ratio.

“But should banks be unable (to meet the requirements), limiting the distribution of profits is the way for these banks to build up their capital position by re-channeling their profits,” Tetangco said.

The restriction would be lifted once the banks increase their capital ratios to the minimum level.

The DSIB will also be required to come up with “concrete and reasonable recovery plans” in case the firm fails to meet capital requirements. The BSP said that these banks will be subject to “more intensive supervision.”

The central bank said it will adopt a phased-in approach for the higher capital requirements for the “too big to fail” banks. These banks will be informed of their DSIB status by mid-2015 but this will not be made public and will be treated as a confidential matter between the BSP and the financial institution.

DSIBs will be asked to meet the new capital ratios by Jan. 1, 2019 and the BSP said a step-ladder type threshold will be used for the CET1 of these banks starting Jan. 1, 2017.