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RP banks' capital above international standards

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) said local banks managed to keep their capital levels significantly above international standards as the industry survived the impact of the global financial crisis that started in 2008.

The BSP reported over the weekend that the banking system recorded a capital adequacy ratio (CAR) level of 15.8 percent on a consolidated basis in the second semester of last year.

“Banks remains solvent during the semester in review as CAR was above regulatory and international standards at 15.8 percent,” the central bank stated in its report on the Philippine financial system for the second semester of 2009.

The central bank pointed out that the Philippine banking system remained well above the international benchmark ratio of eight percent and the BSP’s own 10-percent minimum requirement.

The CAR is a ratio of a bank’s capital to its risk and the central bank tracks this indicator to ensure that banks have the capability to absorb a reasonable amount of loss and that they are complying with their statutory capital requirements.

The BSP added that the banks’ compliance ratio with minimum capital further strengthened to 82.6 percent from last year’s 81.7 percent.

The BSP said several banks issued supplementary capital instruments since hard times struck in 2008 to keep their capital levels significantly above international standards.

The central bank has already agreed to defer by a year the implementation of a new set of capital requirements for banks under Circular 639 or the implementing regulation on the Internal Capital Adequacy Assessment Process (ICAAP) that were supposed to take effect starting January 2010.

Under the ICAAP, banks will be required to provide sufficient capital—or other resources—to cover non-traditional types of risks involved in operating a bank. These include reputation risk, strategic risks, interest rate risks, compliance risks, liquidity risks and credit concentration risks.

Currently, banks are only required to provide capital cover for common types of risks, mainly credit risk, which is the risk of borrowers defaulting on their loans.

The circular, which will now take effect in January 2011, states that banks must submit to the BSP a detailed report indicating all the risks it is exposed to, quantify these risks, determine the amount of capital they think is sufficient to cover for all these risks, and raise the required capital.

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