By Lee C. Chipongian The Bangko Sentral ng Pilipinas (BSP) has approved smaller banks’ higher capital adequacy standards for stand-alone thrift, rural and cooperative banks to ensure sufficient buffer against unexpected losses. The "enhanced" capital standards – as the BSP refers to the additional capital – for these banks include a six percent minimum for Common Equity Tier 1 (CET1) ratio and 7.5 percent Tier 1 ratio. These capital ratios are on top of the existing capital adequacy ratio (CAR) requirement of 10 percent. “The enhanced capital standard is aimed at promoting the safety and soundness of individual banks and the banking system,” the BSP said. As of end-January this year, there are 50 thrift banks supervised by the BSP and majority are stand-alone banks. There are 424 rural banks and 25 cooperative banks. Tier 1 capital is mostly CET1 capital such as common shares, additional paid-in capital, retained earnings, and undivided profits. The remaining component or the additional Tier 1 capital is eligible perpetual capital instruments. “Since the composition of qualifying capital of covered banks under the current framework are already in the form of common equity, no significant change is expected resulting from the new capital categories,” the BSP said. The stand-alone thrift, rural and cooperative banks will also have a 2.5 percent capital conservation buffer (CCB) requirement, also part of Basel 3 standards. According to the BSP, the CCB as CET1 capital is computed in excess of the six percent CET1 ratio. “This requirement ensures that covered banks have capital buffers which can be drawn as losses are incurred. When certain levels of CET1 capital are breached, the bank concerned will be restricted from distributing earnings like dividends in order to build its CCB,” said the BSP. The central bank will allow an observation period until December 31, 2021 for a smooth transition. In the meantime, the smaller banks will have to submit parallel CAR reports that have both the existing and new ratios.