The Bangko Sentral ng Pilipinas (BSP) is currently reassessing how it could expand its macroprudential policy toolkits and to make it more systemic-based such as the countercylical capital buffer (CCyB) for big banks to prevent the build-up of systemic risks in times of financial sector stress.
In a report, the BSP is noted to be exploring the CCyB recalibration, its mechanisms, and how best to operationalize it.
In addition, the BSP is also fixing or remedying its stress tests in relation to the CCyB to improve how it analyzes financial system vulnerabilities, particularly those coming from outside of the banking sector. The objective is to come up with sector-specific policies, according to the central bank.
The BSP approved the CCyB in late 2018 and it is not yet active at the moment. The capital buffer is part of Basel 3 and is aimed at managing and guiding credit growth.
Based on BSP Circular No. 1024, the CCyB is set at zero percent and subject to upward adjustment to a rate that will be determined by the Monetary Board of the central bank when systemic conditions warrant but not to exceed to 2.5 percent. In the event that an increase to the CCyB is approved, it will be set after one year from its announcement while a decrease will take effect immediately.
The CCyB framework as it is now, is used to monitor and mitigate the build-up of systemic risks in the banking sector.
Compliance to the CCyB rule is through banks’ common equity tier 1 (CET1) capital. Basically, during periods of stress, the Monetary Board can lower the CCyB requirement, effectively providing the affected banks with more risk capital to deploy. During periods of continuing expansion, the CCyB may be raised which has the effect of setting aside capital which can be used if difficult times ensue, the BSP explained.
CCyB ensures that the banking sector in aggregate has enough capital on hand to help maintain the flow of credit in the economy without its solvency being questioned when the broader financial system experiences stress.
The BSP is also planning to set up an updated resolution framework for problematic banks first before adopting a positive and neutral CCyB. This was what the BSP told the International Monetary Fund (IMF) during its most recent Article IV Consultation in the last quarter of 2024.
The IMF has acknowledged the progress made by the BSP for a neutral CCyB..
The BSP will submit legislative proposals by the middle of 2025 for the development of an effective resolution framework while also facilitating the establishment of a resolution unit.
Meanwhile, credit agency Fitch Ratings previously reported that the BSP’s CCyB framework will be useful as a policy tool to curb any excessive or rapid credit growth in the future.
The CCyB framework was scrutinized by the banking community for a long time before it was approved by the BSP. Banks were apparently worried about the risk triggers that would set it in motion.
As a systemic risk tool, it primarily focuses on the pace of credit growth.