BSP orders capital boost for small banks

MANILA, Philippines — The central bank has asked small lenders to boost their capital to ensure they are able to absorb shocks and ensure continuity of services to their depositors even in times of distress.

In a statement on Wednesday, the Bangko Sentral ng Pilipinas (BSP) asked thrift, rural and cooperative banks to set aside a minimum of 6% common equity tier 1 (CET1) ratio and another 7.5% Tier 1 ratio.

The new provisions will be implemented on top of the existing minimum capital adequacy ratio of 10%.

“The enhanced capital standard is aimed at promoting the safety and soundness of individual banks and the banking system,” the BSP said. 

Tier 1 capital is largely comprised of CET1 capital elements such as common shares, additional paid-in capital, retained earnings and undivided profits, which are mainly composed by highly liquid assets that may be converted easily to cash when needed. The additional Tier 1 capital is mostly made up of eligible perpetual capital instruments.

According to the new rules, when certain levels of CET1 capital are breached, the bank will be restricted from distributing earnings like dividends in order to build up its capital, the central bank explained.

Aside from raising capital requirements, thrift, rural and cooperative banks would also be required to set aside 2.5 percent of CET1 as capital conservation buffer, similar to their bigger counterparts. The buffer capital is another layer of funds available to banks in times of economic stress.

The modifications are in line with the Basel III reforms, the internationally-agreed measures developed to prevent a repeat of the 2008 global financial crisis. BSP has set a transition period of up to end-2021 for the changes.

Thrift lenders welcome new rules

“Our members are definitely strong enough to meet the requirements,” said Suzanne Felix, executive director of Chamber of Thrift Banks, an industry group.

“I don’t think it will affect lending in general (our lending capacities will remain the same), though this may have an impact on banks which are into hybrid instruments,” she said in an e-mail.

Unlike bigger universal and commercial banks, risks of getting shuttered are higher in small lenders taking up bigger liabilities. Regulators have long advocated small lenders to merge or consolidate to improve their financial standing, but such moves have been largely unsuccessful.

Last year, BSP closed 11 lenders and put under receivership by the Philippine Deposit Insurance Corp., data showed. Three of the closed banks were thrift lenders, while eight were banks based in the country-side.