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BSP aligns capital standards of foreign bank branches with Basel 3

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MANILA - The Bangko Sentral ng Pilipinas (BSP) has tightened the capital standards for foreign bank branches to align them with the Basel 3 Accord.

In a statement, the BSP said the Monetary Board has approved amendments to the capital framework of foreign bank branches, foremost of which is the restriction of tier 1 capital to permanently assigned capital.

 “This new initiative strengthens foreign bank branches in the Philippines because they will have their capital onshore when they take on onshore risks,” BSP Governor Amando M. Tetangco Jr. said.

This is the “prudent policy direction since it will reduce unwarranted reliance of foreign bank branches on their parent entity for capital support when operating domestically,” he said.

The Philippines will implement the Basel 3 framework, which is the latest tranche of international bank capital standards, starting January. Under Basel 3, foreign bank branches must meet all prescribed minimum rations, including a common equity tier 1 ratio of six percent, a tier 1 ratio of 7.5 percent and a capital conservation buffer of 2.5 percent, which can be met only by common equity tier 1-eligible instruments.

Republic Act No. 7721 or an Act Liberalizing the Entry and Scope of Operations of Foreign Banks in the Philippines introduced the concept of permanently assigned capital.

Foreign bank branches that fail to meet the prescribed minimum capital ratios by January 1, 2014 have a year to comply.

Instruments booked under the "net due to" account will now be reclassified as tier 2 capital.

“Net due to” accounts typically reflect transactions between the foreign bank branch and its parent entity, and include placements, investments and borrowings. Before Basel 3, “net due to” accounts were categorized as tier 1 capital.

The BSP also requires foreign bank branches to submit no later than April 1, 2014 their capital build up plans to reflect not only how they intend to meet Basel 3, but also the necessary approvals from their parent entities abroad.

 

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