INTERNATIONAL credit watcher Fitch Ratings lauded the Bangko Sentral ng Pilipinas (BSP) for the recently approved required capital buffers for local banks, but said this raised the question of how financial institutions are going to put up the new requirement.
In a recent release, Fitch said the Central Bank’s new Basel III countercyclical capital buffer (CCyB) rules complete the BSP’s implementation of international standards for banks in terms of capital.
“The newly announced CCyB rules are a sign of progress on one of Bangko Sentral ng Pilipinas’s stated priorities—to expand its policy tool kit, as laid out by Central Bank Governor Nestor Espenilla in a speech earlier this year,” Fitch said.
Just last week, the BSP announced the new rules regarding the CCyB, which the BSP said will be compiled from the banks’ common equity tier 1 profile.
“During periods of stress, the Monetary Board can lower the CCyB requirement, effectively providing the affected banks with more risk capital to deploy. During periods of continuing expansion, the CCyB may be raised, which has the effect of setting aside capital [that] can be used if difficult times ensue,” the BSP earlier said.
“The buffer, however, will be continuously reviewed by the BSP. Banks will be given a lead time of 12 months in the event that the CCyB buffer is raised. However, when the buffer is reduced, it takes effect immediately,” it added.
The current CCyB is set at zero percent, which the BSP said suggests that it “does not see the ongoing buildup of credit as an imminent risk.”
Fitch said the question is at what point the CCyB rate will be increased.
“Uncertainty on the CCyB trigger had been raised as recently as last month by the banks, and was seen as a potential hiccup in the implementation of the framework,” the credit watcher said.
Fitch flagged that the CCyB rate will add to the hurdle for dividend payment by banks, and raise the trigger point for domestic systemically important banks’ recovery plans.