By Lee C. Chipongian
The Bangko Sentral ng Pilipinas (BSP) has approved the adoption of the counter-cylical capital buffer (CCyB) for all big banks to prevent build-up of systemic risks in times of stress in the financial sector.
In a statement, BSP Governor Nestor A. Espenilla Jr. said the CCyB, part of Basel 3, is a macro-prudential measures to “help guide the path of future credit growth” that is also “flexible enough to potentially provide immediate effects to address market tightness.”
Based on BSP Circular No. 1024, the CCyB is set at zero percent and subject to upward adjustment to a rate that will be determined by the Monetary Board of the central bank “when systemic conditions warrant but not to exceed to 2.5 percent.” In the event that an increase to the CCyB is approved, it will be set after one year from its announcement while a decrease will take effect immediately.
Espenilla said it is important that the BSP adopts the CCyB framework now while there are no stressed conditions since they could carefully monitor and mitigate the build-up of systemic risks.
Compliance to the CCyB rule will be through banks’ Common Equity Tier 1 (CET1) capital. “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 which can be used if difficult times ensue,” the BSP explained.
Espenilla said since the CCyB is initially set at zero percent, this suggests that they do not see any “ongoing build-up of credit as an imminent risk that would otherwise require an increase in the capital position of banks.”
“The CCyB expands our toolkit for systemic risk management and is specifically designed to provide a steadying hand to counter the common occurrence of boom-and-bust periods within the financial cycle,” the BSP chief added.
The CCyB framework was scrutinized by the banking community for a long time and there were talks earlier that it might not get approved this year because banks were worried about the risk triggers that would set it in motion.
The BSP has repeatedly noted that the capital buffer will not have any “cost consequence” to the banks as far as raising the minimum required CET 1. However, this requirement provides “a trigger that can be instigated in the future should market conditions warrant.”
CCyB, basically, will ensure that the banking sector in aggregate has enough capital on hand to help maintain the flow of credit in the economy without its solvency being questioned when the broader financial system experiences stress.
“We’re setting these tools while there’s no ‘stressed’ system, so we are ahead,” said Espenilla earlier, adding that it will be more difficult to set this up when the financial system has been compromised.
Espenilla said they want the three intervention tools – the CCyB, the Debt-to-Earnings-of-Borrowers’ Test (DEBT) and Borrowers Interconnectedness Index approved as soon as possible.
The CCyB is for “stressed time” while the capital conservation buffer or CCB at 2.5 percent and approved in 2014, is for normal time. “With the CCyB, the credit market is meant to be prevented from drying up during not-so-good times while also providing a means to curb credit growth if it is deemed as expanding at ‘too-strong’ a pace,” according to a BSP report.