Early adopter: Philippines set to introduce Basel III by start-2014

Basel III was formulated as a direct response to prevent another financial crisis occurring within the global banking system. However, the last financial crisis in Asia occurred in 1997. Since then, governments in the region and their financial regulators have undertaken measures which have meant Asian banks have emerged from the last global financial crisis of 2007–08 relatively unscathed.

Basel III introduces a complex package of reforms designed to improve the ability of bank capital to absorb losses and implement stronger firewalls in periods of stress. The Basel Committee on Banking Supervision (BCBS) has outlined a staggered implementation of Basel III stretching through the end of 2018 to allow internationally active banks time to raise capital organically.

Despite this gradual approach, many countries in Asia, including Australia, Hong Kong, Singapore, Thailand and the Philippines, will implement Basel III ahead of time or in a more stringent manner.

In the case of the Philippines, the Central Bank of the Philippines (CBP) has said it will implement the capital requirements in full from January 1, 2014, ahead of the BCBS timeline with no phase-in period for all universal and commercial banks in the Philippines. While the minimum total capital adequacy ratio (CAR) will remain at its current level of 10%, the CBP will require banks to hold a higher minimum common equity Tier I (CET1) ratio of 6% versus the 4.5% under Basel III and a Tier I ratio of 7.5% versus 6% under Basel III. The CBP will also implement the capital conservation buffer of 2.5% on top of the 10% minimum CAR, effectively requiring banks to hold 12.5% of total capital.

Governor of the CBP, Amando Tetangco tells Asia Risk the central bank has set stricter capital standards on “policy grounds” as the central bank has traditionally been more conservative than its regulatory peers. For example, under Basel II, the country’s minimum total CAR of 10% is higher than the 8% norm.

“The CBP has always set its capital adequacy standards higher than the minimum required by the Bank for International Settlements. Our main task as the banking authority is to provide an enabling environment where we strike a balance between nurturing the creativity and innovativeness of banks with the need for prudential controls,” he says.

According to Tetangco, the central bank has conducted studies on the impact of Basel III implementation on Philippine banks, and found compliance will not be a problem for banks.

“We have done internal simulations on the implementation of Basel III and have a semestral stress test on the ability of bank capital to absorb risk scenarios. The banks likewise conducted their own simulations and all the tests suggest that transition to Basel III is largely a non-issue. This reflects the fact that system CAR is hovering at 17% of which 14 percentage points is for Tier I alone,” he says.

Playing politics

Despite the fact that banks are in a strong position to meet the new regulations, there are some who are not happy about the CBP’s accelerated time frame.

“I can’t understand why they would want to accelerate the implementation. My thinking is that this is more for political reasons so that they can say the Philippine banks were one of the first to comply with Basel III. And also maybe because the government is chasing an investment-grade upgrade,” says a chief risk officer at a medium-sized Philippine commercial bank who declined to be named.

Currently, Fitch Ratings, Moody’s and Standard & Poor’s all rate Philippine foreign currency long-term debt at a notch below investment grade.

“For our bank, we don’t have a problem meeting Basel III capital requirements as all of our capital is already Tier I. For the liquidity ratios, we have already started complying with the net stable funding ratio, one of two liquidity measures contained within Basel III, as early as 2010,” says the chief risk officer.