Impact of banking reforms on lending rate marginal — BSP

MANILA, Philippines — The major reforms undertaken by the Bangko Sentral ng Pilipinas to sustain the resiliency of the country’s banking sector had a marginal impact on lending rates, according to a study conducted by the central bank.

According to the study,   the imposition of higher capital adequacy ratio (CAR) and liquidity coverage ratio (LCR) in compliance with a set of standards to strengthen global capital and liquidity rules under Basel III had minimal impact on bank lending rates.

The study showed a minimal 0.2 percent rise in the banks’ lending rates arising from a one percent increase in CAR as well as 0.04 percent increase in rates due to the five percent rise in the LCR.

“Under the simplifying assumptions, the impact on lending rates of CAR and LCR regulatory adjustments is found to be marginal. Moreover, the findings also indicate that banks are rebalancing their portfolio in response to the prudential regulations,” the BSP said.

Under the Basel III risk-based capital framework aimed at enhancing banks’ and banking systems’ abilities to absorb shocks arising from financial and economic stress, the BSP required banks to maintain risk-based capital, expressed as a percentage of qualifying capital to risk-weighted assets, at no less than 10 percent in 2014.

Latest data showed the CAR of big banks stood at 15.4 percent as of end-December, while that of mid-sized banks reached 16 percent. These levels were above the BSP’s threshold of 10 percent and the eight percent requirement of the Bank for International Settlement.

Last year, the regulator also started to phase in the LCR requiring big banks and their subsidiary banks to maintain, over a 30-calendar day horizon, an adequate level of unencumbered high quality liquid assets including cash or assets that can be converted into cash at little or no loss of value in private markets, to offset the net cash outflows it could encounter under a liquidity stress scenario.

The study assumed that there is enough supply of high quality liquid assets to absorb excess funds that may be re-allocated from the loan portfolio. LCR refers to the ratio of high quality liquidity assets to total net cash outflows.

Preliminary data as of end-October 2018 indicated the LCR of the universal and commercial banks stood at 154.6 percent, way above the BSP’s current regulatory threshold of 90 percent.

The regulator pursues reforms aimed at ensuring the safety and soundness of BSP supervised financial institutions by setting out standards that promote continued enhancement of corporate governance and risk management standards, with due regard to proportionality.

“However, the BSP’s actions entail some necessary costs to ensure the safety, soundness and resilience of the banking system,” it added.

The BSP has decided to give big banks more time to build up their liquidity positions by moving the effectivity of the LCR and net stable funding ratio (NSFR) compliance to January 2020 from the original target of January 2019.

The Basel Committee on Banking Supervision has adopted the Basel 3 framework prescribing supervisory tools to improve risk management and prevent a repeat of the 2008 global financial crisis.