BSP Enhances Capital Adequacy Standards for Stand-Alone Thrift, Rural and Cooperative Banks

The Monetary Board approved the amendments to the Risk-Based Capital Adequacy Framework for stand-alone thrift banks (TBs), rural banks (RBs) and cooperative banks (Coop Banks) to further enhance the quality of capital of covered banks. This reinforces the importance of maintaining sufficient level of common equity which could absorb losses on an ongoing basis.

The enhanced capital standards provide minimum capital ratios of 6 percent Common Equity Tier 1 (CET1) ratio and 7.5 percent Tier 1 ratio. This is in addition to the existing minimum capital adequacy ratio (CAR) of 10 percent. Tier 1 capital is largely comprised of CET1 capital elements such as common shares, additional paid-in capital, retained earnings, and undivided profits. The remaining component, Additional Tier 1 capital is mostly made up of eligible perpetual capital instruments. Since the composition of qualifying capital of covered banks under the current framework are already in the form of common equity, no significant change is expected resulting from the new capital categories.

Meanwhile, the 2.5 percent capital conservation buffer (CCB) requirement is also introduced in the revised framework. The CCB is in the form of CET1 capital and is computed in excess of the 6 percent CET1 ratio (e.g., 10 percent CET1 ratio, 4 percent CCB). This requirement ensures that covered banks have capital buffers which can be drawn as losses are incurred. When certain levels of CET1 capital are breached, the bank concerned will be restricted from distributing earnings like dividends in order to build its CCB.

The Bangko Sentral provides an observation period until 31 December 2021 to allow the smooth transition to the amended capital requirements. During the said period, covered banks are required to submit parallel CAR reports using the existing and new frameworks.

The enhanced capital standard is aimed at promoting the safety and soundness of individual banks and the banking system. The modifications to the risk-based capital adequacy framework for stand-alone TBs, RBs and Coop Banks largely conform with the Basel reforms.

Source: Bangko Sentral ng Pilipinas