BSP tightens computation of banks’ net worth

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) has revised the method in computing the required capital of banks to ensure that it is comprised only of instruments that are of the highest quality to absorb losses.

BSP Governor Nestor Espenilla Jr. has issued a circular stating the decision of the Monetary Board to amend the guidelines on the computation of required capital of banks.

BSP Deputy Governor Chuchi Fonacier said the circular aligns, to the extent possible, the composition of capital accounts for purposes of determining net worth with that being used for determining the capital adequacy ratio (CAR).

Fonacier said the composition of accounts considered as capital for purposes of determining the net worth and the qualifying capital slightly differs prior to the issuance of the circular.

“This is to ensure that capital is only comprised of instruments that are of the highest quality to absorb losses,” she said.

The regulator requires banks and quasi-banks to comply with the prescribed minimum capitalization and the risk-based CAR depending on the bank’s category, whether universal, commercial, thrift, rural or cooperative bank, as well as the number of its branch network.

Compliance with the prescribed minimum capitalization is determined by computing for the bank’s net worth.

On the other hand, the risk-based CAR, which is a risk-sensitive measure of a bank’s solvency position, is expressed as a percentage of a bank’s qualifying capital to its risk-weighted assets. CAR is aligned with the Basel standards on capital measurement.

The term capital is synonymous to unimpaired capital and surplus, combined capital accounts and net worth and refers to the total of the unimpaired paid-in capital, surplus, and undivided profits.

Under the new circular, Fonacier said deposits for stock subscription classified as equity would now be part of banks’ net worth. These refer to payments made by existing or new stockholders of the bank on subscription to the increase in the authorized capital.

On the other hand, Fonacier said treasury stock representing shares reacquired by the issuing entity from stockholders would now be deducted from the computation of required capital or net worth.

“This is in view that said shares are no longer available to absorb losses, which is a primary characteristic of a capital instrument,” Fonaceir said.

Furthermore, she said the amount of deferred tax assets to be deducted from capital would be net of any allowance for impairment and associated deferred tax liability.

However, any excess of the deferred tax liability would not be added as part of net worth. Previously, deferred tax assets are deducted in full amount, that is, gross of allowance for impairment.

Fonacier said appraisal increment reserve referring to the increase in the value of fixed assets due to revaluation is also now excluded in the computation of net worth considering that it does not form part of the net worth base.

Latest data from the BSP showed the local banking industry is well-capitalized with a CAR of 15.36 percent as of end September last year, well above the international standard of eight percent and the BSP’s regulatory requirement of 10 percent.

The industry also remains liquid with the liquidity coverage ratio of big banks at 157.6 percent on solo basis as of end-September, well above the current regulatory threshold of 100 percent.

Over the past two decades, the BSP has been implementing strategic reforms that have resulted in higher capitalization and stronger risk management systems to manage potential threats.