BSP tightens rules on bank group credit risk

The Bangko Sentral ng Pilipinas (BSP) has tightened rules on how banks can offset credit risk from loans guaranteed within a banking group, introducing a risk-weighted cap to ensure that capital relief better reflects underlying financial risks.

Circular No. 1233 dated May 18 amended the regulations governing credit risk transfers arrangements.

Such arrangements allow lenders to reduce the perceived risk of a loan—and therefore the capital they must hold—by relying on guarantees or credit derivatives from eligible counterparties, including guarantees provided within the same banking group, such as between a foreign head office and its Philippine branch.

Previously, such intragroup guarantees were capped at 100 percent of a bank’s outstanding loan portfolio as of the preceding month. The total loan portfolio comprises interbank loans, receivables from loans and reverse repurchase transactions with the BSP and other banks.

The ceiling remains in place under the revised rules, but exposures must now be credit risk-weighted. The adjustment requires banks to apply the risk weight of the guaranteeing entity—such as a head office or a bank branch—to both banking book exposures and the credit-equivalent amounts of off-balance sheet items.

For risk transfer arrangements involving credit derivatives, the BSP said the bank shall apply the risk weight of the protection seller to the protected portion of the exposure being hedged.

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Latest data from the BSP showed nonperforming loans (NPL), or debts overdue by at least 90 days and at risk of default, had accounted for 3.29 percent of the local banking sector’s total lending portfolio as of March. That marked the lowest gross NPL ratio since December 2025, when the share stood at 3.07 percent.

In peso terms, roughly P568.6 billion of the sector’s P17.3-trillion loan book had soured during the month. The stock of bad loans was over 10 percent higher than a year earlier and nearly 3 percent higher month-on-month.

In its latest report on the local financial system, the BSP said local banks continued to strengthen credit risk management through stricter underwriting standards, enhanced credit scoring and collection frameworks, wider use of digital and early-warning tools, and timely remedial actions.