BSP tightens capital adequacy assessment of key big banks

Published April 21, 2021, 7:00 AM

by Lee C. Chipongian

The Bangko Sentral ng Pilipinas (BSP) will require domestic systemically important banks or D-SIBs to submit independently their recovery plans and Internal Capital Adequacy Assessment Process (ICAAP), and to ensure these documents have consistency and coherence.

BSP Governor Benjamin E. Diokno (Bloomberg file)

 D-SIBs are banks whose distress or disorderly failure would cause significant disruptions to the wider financial system and the economy.

 The updated guidelines on D-SIBs’ recovery plan was approved as Circular No. 1113, signed by BSP Governor Benjamin E. Diokno last Friday. It said the reporting and review of the recovery plan as a distinct document from ICAAP will be submitted every June 30 of every year, and this will start next year.

 In the circular memo, Diokno said the amendments will require D-SIBs to submit separately their ICAAP document and recovery plan. “D-SIBs are expected to ensure that processes and information contained in these documents are consistent, coherent and up to date,” he said. The BSP will review the recovery plan as part of the overall supervisory process for D-SIBs with focus on “robustness, credibility and ability to be effectively implemented.”

 BSP’s D-SIBs policy is aligned with the Basel Committee on Banking Supervision which aims to “reduce the probability of failure of D-SIBs by increasing their going-concern loss absorbency and to reduce the extent or impact of failure of D-SIBs on the domestic/real economy.”

 The D-SIBs framework consists of assessment methodology, higher loss absorbency (HLA) and interaction with other elements of Basel-3, and intensive supervisory approach.

 The latest amendment in the D-SIBs guidelines were made in the intensive supervisory approach, which said these “too big to fail” banks should prepare “concrete and reasonable” recovery plans which will have to be in place in case of breaches to the HLA capital requirement.

According to the circular, the ICAAP outcome and potential measures to address capital needs will “feed without delay in the recovery plan, and vice versa, to ensure that the processes and information are consistent and up to date.”

As for the recover plans, the BSP said these will still contain guidelines and action plans to restore D-SIBs’ financial condition in cases of significant deterioration, and will include banks’ risk profile such as capital raising activities, streamlining of businesses, restructuring and disposal of assets, to improve capital position.

Diokno said in January that it is crucial to determine the true condition of D-SIBs and its impact on the Philippine banking system (PBS), the banking industry as a whole, and on the economy currently in recession.

Diokno has said that measures on how they monitor, assess and review the capital health of D-SIBs has been improved to “ensure that the BSP will be able to determine the true status or health of the financial system and individual banks.”

Unlike some Asian central banks, the BSP has yet to publicly identify D-SIBs. The BSP initially listed 14 banks but were not named. As of end-2020, there are 46 big banks, or banks with universal and commercial banking license, and these control more than 93 percent of PBS assets.

The International Monetary Fund said it has been a concern that majority of D-SIBs are controlled or part of conglomerate structures or wider groups of non-regulated parent companies and affiliates with non-banking activities, therefore the BSP has no power over them.