BSP will adjust the rules on large exposures

ByRichard C. Sloan

Apr 17, 2022

THE PHILIPPINE central bank proposes to modify the guidelines on major risks for large banks and their subsidiaries, in particular affor to improve credit concentration risk management.

The circular proposed by Bangko Sentral ng Pilipinas (BSP) also outlines regulatory reporting requirements for banks under large exposures to ensure that risks will be properly monitored.

“Financial institutions supervised by BSPs (BSFIs) are expected to correctly and accurately identify, measure, monitor and control large exposures in the books and operations in order to protect the solvency of the BSPs against maximum losses resulting from a sudden failure consideration”, published the draft circular. on the indicated BSP website.

Under the proposed rules, an exposure is considered a large risk if it is equal to or greater than 10% of a bank’s eligible capital.

“Large exposures are exposures to a counterparty or group of related counterparties equal to or greater than 10% of the covered banks’/near-banks’ Tier 1 capital,” the rules say.

This is a change from the old deIfnition of a large risk which was 5% of the eligible capital of a lender.

Tier 1 capital is defined as a lender’s capital base, which includes its disclosed reserves and equity. Meanwhile, eligible capital is part of Tier 2 which is additional capital for banks.

The framework will apply to universal and commercial banks as well as their lending and near-bank subsidiaries.

The large exposures framework for universal banks and their subsidiaries will be implemented by January 1, 2024, based on the transitional provision of the circular.

Stakeholders have until April 29 to submit their comments on the draft regulations to BSP.

The circular also defined the criteria for assessing the economic interdependence of counterparties that have borrowings from banks to determine significant exposure.

The BSP said banks should verify whether 50 percent or more of a counterparty’s annual gross revenue or gross expenditure comes from transactions with the other party.

Lenders should also consider whether the financial difficulties, insolvency or default of one counterparty could in turn affect other counterparties in terms of debt repayment.

The central bank said lenders should also assess the funding source of counterparties and whether there is no other fund provider that could back up counterparties if the primary funding source fails.

“In cases where the criteria do not automatically imply economic dependence resulting in the connection of two or more counterparties, Covered Banks must provide evidence to the BSP that a counterparty that is economically dependent on another can still pay its liabilities within a reasonable time. time even if the latter’s financial situation weakens,” the BSP said.

Banks are expected to ensure they have the monitoring and reporting requirements related to their large exposures at all times, it will be veriIfby BSP. These large risks will be declared on a half-yearly basis or every June 30 or December 31 of each year.

The BSP pointed out that the banking system has remained stable and well capitalized despite the deterioration in the quality of banks’ assets amid the pandemic. He attributed this to the regulatory reforms that were implemented in the wake of the Asian financial crisis and the global financial crisis. Luz Wendy T. Noble