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BSP amends foreign banks’ capital framework to comply with Basel 3

The Bangko Sentral ng Pilipinas (BSP) has amended the capital framework of foreign bank branches in the country to align provisions with Basel 3 principles which will be adopted by domestic banks next month.

BSP Governor Amando M. Tetangco Jr. yesterday said the aim is to strengthen foreign banks operating in the Philippines and to make the banks – all 14 of them – strong and independent of their respective parent banks, capital-wise.

“This new initiative strengthens foreign bank branches in the Philippines because they will have their capital onshore when they take on onshore risks,” said Tetangco. He said that this “prudent policy direction” will effectively make foreign banks self-reliant as a local unit of global banks.

“(It will) reduce unwarranted reliance of foreign bank branches on their parent entity for capital support when operating domestically,” added Tetangco.

The BSP’s Monetary Board approved amendments designed to strengthen the capacity of foreign bank branches to absorb risks from their local operations. Foreign banks which will need more time will be given until April next year to comply.

Under the new framework, the capital component of foreign bank branches is classified as Tier 1 and predominantly composed of permanently assigned capital (PAC). The BSP explained that PAC was included in Republic Act 7721 (An Act Liberalizing the Entry and Scope of Operations of Foreign Banks in the Philippines and for Other Purposes).

In the meantime, foreign bank branches’ accounts which are booked under the “net due to” account will now be re-classified as Tier 2 capital, said the BSP. These accounts typically reflect transactions between the foreign bank branches and its parent entity and include placements, investments, and borrowings. Also, “net due to” accounts were previously categorized as Tier 1 capital under the older Basel 2 framework. “The new policy is consistent with the intention of the reforms under Basel 3 to classify as Tier 2 the debt instruments that are deemed eligible as Basel 3 capital,” explained the BSP.

When the BSP implements the Basel 3 framework for local banks by January, this will also apply for foreign bank branches which will have to meet all prescribed minimum ratios such as the six percent common equity Tier 1 (CET1) ratio, the 7.5 percent Tier 1 ratio and a 2.5 percent capital conservation buffer which can only be met by CET1-eligible instruments.

The BSP clarified that for foreign bank branches, common equity is represented by PAC.

“With the recent amendment approved by the Monetary Board, foreign bank branches which do not meet the prescribed minimum capital ratios on January 1, 2014 will be given a year or up to January 1, 2015 to comply,” said the BSP. “However, a capital build up plan must be submitted by these foreign bank branches to the BSP by April 1.”

“This capital build up plan does not only reflect how these foreign bank branches intend to meet the new prudential thresholds but also the necessary approvals from their parent entity,” added the BSP.

The Philippines is implementing Basel 3 capital standards five years ahead of the bigger economies which will be implementing the new regulatory capital ratios on a stagger basis up to 2019.

Tetangco said earlier that the guidelines which will help banks to shift to the new capital standards will be an “important (transition) step towards further strengthening the banking system.” Thus, he sees no further reasons for delaying implementation.

As of February this year, the 14 foreign banks (down from 16 in 2012) have been submitting its own Internal Capital Adequacy Assessment Process or ICAAP for two years. It was in 2011 when the BSP first required foreign banks to submit the ICAAP starting in 2012 to see how these banks assess their capital against their risk profiles.

Branches of foreign banks have not been required to submit their own ICAAP documents before 2012 since there are arrangements between “home and host” supervisors of international banks.

Over the years, however, the BSP has been encountering difficulties in obtaining ICAAP  assessments from the foreign banks’ head offices overseas.

BSP in a report said it was not able to verify how foreign banks’ domestic operations are incorporated in the plans of the parent bank and the extent that local circumstances are taken into account in the strategic and capital planning for the branch.