BSP to tighten rules on tier 1 notes redemption
The Bangko Sentral ng Pilipinas (BSP) wants to tighten the conditions under which banks may repay certain capital-qualifying debt instruments ahead of schedule, aiming to prevent the erosion of balance sheet or masking of signs of financial strain.
The central bank is seeking industry feedback on a draft circular that would revise the rules governing the exercise of call options and the redemption of unsecured subordinated capital securities that qualify as additional Tier 1 capital.
Comments will be accepted until Dec. 29, with the proposed amendments set to apply to both publicly issued and privately negotiated instruments to harmonize the rules.
Under current regulations, banks may redeem these capital-qualifying securities once a call option becomes exercisable, typically after five years, allowing them to retire the debt before maturity. Such redemptions are often undertaken when interest rates decline, enabling borrowers to refinance at lower costs and replace the debt on more favorable terms.
That said, the proposal seeks to ensure that redemptions are done from a position of strength, not weakness.
According to the draft, banks may exercise call options as long as they comply with applicable and existing capital adequacy frameworks. This includes the immediate replacement of the redeemed instrument with capital of the same or better quality and size.
“For this purpose, ‘more than adequate’ shall mean compliance with the minimum capitalization and risk-based capital ratios, plus additional capital buffers as the issuing bank may determine to be appropriate and sufficient in the context of its risk profile and prevailing market conditions,” the draft read.
“At no point shall the capital adequacy ratio fall below the early warning thresholds set under the [bank’s] Internal Capital Adequacy Assessment Process or Recovery Plan,” it added.
Banks must prove that even after redemption, they still meet liquidity coverage and net stable funding ratios. They must also show they have enough high-quality liquid assets to survive at least 30 days of stress.
