Capital, liquidity buffers of banks remain intact

MANILA, Philippines — The capital and liquidity buffers of Philippine banks were largely untouched despite the regulatory relief measure extended by monetary authorities at the height of the pandemic, according to Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno.

“Even though covered banks were provided with this relief, it remained largely untouched. Covered banks opted to maintain their liquidity positions at levels higher than the regulatory minimum to ensure institutional stability and strengthen capacity to support the long term financing requirements of a recovering economy,” Diokno told reporters.

At the height of the strict COVID lockdowns in May 2020, the BSP allowed banks to utilize their capital and liquidity buffers under Basel III to absorb losses and support financing requirements.

The Monetary Board approved Memorandum 2020 – 039, which allows a bank that has built up its capital conservation buffer and liquidity coverage ratio (LCR) buffer to utilize it during the health emergency.

The use of the buffers is in line with the objective of the BSP’s prudential framework so banks are encouraged to act along this principle for purposes of absorbing losses and support the financing requirements of the economy.

It said a bank that draws down its 2.5-percent minimum capital conservation buffer would not be considered in breach of the capital adequacy framework.

A bank that utilizes its buffer is restricted from making distributions in the form of dividends, profit remittance in the case of a foreign bank branch, share buybacks, discretionary payments on Tier 1 capital instruments or discretionary bonus payments to staff.

Likewise, a bank could also draw on its stock of liquid assets to meet liquidity demands, even if this may result in the required 100 percent minimum LCR.

The regulator adopted the LCR and net stable funding ratio (NSFR) for big banks in January 2020.

The LCR mandates big banks to hold high-quality and easily convertible assets to cover their total net cash outflows for a 30-day period, while the NSFR requires financial institutions to hold enough liquidity or reliable sources of funding to match their expected funding needs for a longer period of one year.

Diokno said the liquidity buffers of banks remain relatively stable, with liquidity coverage ratio of universal and commercial banks at 197.7 percent on a solo basis as of end- November last year.

“That’s almost twice the required minimum of 100 percent,” the BSP chief said.

Similarly, the minimum liquidity ratio of stand-alone thrift, rural and cooperative banks surpassed the 20 percent minimum.

Early this year, the BSP extended the prudential and operational relief measures needed to sustain the momentum of bank lending and to ensure continued access to financial services by the public, including the vulnerable sectors of the economy.

The COVID response measures of the central bank including the aggressive 200-basis- point interest rate cuts, the lowering of the reserve requirement ratio, among others unleashed P2.3 trillion into the financial system.