Bank capital buffer rules tightened

The Bangko Sentral ng Pilipinas (BSP) will now require banks to build extra capital even during periods of normal credit expansion, a move aimed at strengthening lenders’ buffers and ensuring continued lending during economic downturns.

Under Circular No. 1235 dated May 20, the central bank established the framework for implementing the Countercyclical Capital Buffer, or CCyB, and adopted what it calls a “positive neutral rate”.

It is a mechanism designed to ensure that banks accumulate additional capital buffers during periods of normal or strong economic conditions, when lending activity tends to accelerate.

If financial stress appears—like during a recession—the BSP can ease the requirement to free up capital so lending activities can continue.

“The reform will strengthen the country’s financial stability as it enables banks to set aside capital that can be released in bad times to keep credit flowing to households and firms,” BSP Gov. Eli Remolona Jr. said.

“The Philippines joins countries that have built releasable buffers ahead of potential crises,” he added. “This enhances our ability to respond swiftly to shocks without increasing the overall capital burden on banks.”

The CCyB, introduced under the global Basel III reforms following the 2008 global financial crisis, is calculated as the weighted average of buffer rates applied in jurisdictions where banks have credit exposures. Although the Philippines had incorporated the measure into its regulatory framework in 2018, it remained inactive while the central bank refined its approach to operationalizing it.

Previously, the CCyB effectively stayed at zero. The Monetary Board may raise it up to 2.5 percent when systemic risks warrant.

Under the updated framework, however, the buffer may now be activated even in normal conditions, starting from zero to a positive neutral level. The neutral rate—to be set by the Monetary Board—will not be fixed and may be adjusted as systemic risk conditions evolve.

If a bank’s capital falls below certain levels, it would not be allowed to dip into the buffer.

Meanwhile, local lenders that are deemed too big to fail are required to hold more capital than normal banks.

“The CCyB may be increased above the positive neutral rate when systemic risk assessments indicate a sustained buildup of vulnerabilities,” the circular explained.

“The CCyB may be reduced, in whole or in part, when systemic stress becomes evident, or when maintaining the prevailing buffer level may constrain the sustainable provision of credit to the real economy,” it added.

The new rules will be implemented in phases. Big banks, their subsidiaries and quasi-banks are given one year from effectivity to comply, while digital banks are given two years.