MANILA, Philippines – The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) has approved new guidelines for the implementation of Basel 3 leverage ratio requirements for universal and commercial banks (U/KBs) and their subsidiaries.
The leverage ratio relates the level of the bank’s tier 1 capital against its total on-book and off-book exposure. The Monetary Board has approved the ratio to be set at 5% minimum, the BSP announced in a statement Friday, May 29.
This effectively means that the maximum exposure a bank can have is 20 times its tier 1 capital.
Basel 3 is a global voluntary regulatory standard on bank capital adequacy, stress testing, and market liquidity risk. It was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007 to 2008.
Under the Basel 3 reform agenda, the leverage ratios need to be appreciated along with the Capital Adequacy Ratio (CAR). Both ratios give an indication of a bank’s capital against its exposure, providing guidance of the extent of assets it can carry.
The main difference between the two ratios is that the leverage ratio treats both on-book and off-book assets uniformly without adjusting for differences in riskiness.
The approval of the Monetary Board includes a monitoring period up to end-2016. During this period, sanctions will not be imposed on banks falling below the 5% minimum.
However, covered institutions are required to submit periodic reports. Any adjustments to the guidelines will be issued before the requirement takes full effect on January 1, 2017.
The BSP also approved new guidelines that reaffirm the policy requiring the listing of Long Term Negotiable Certificates of Time Deposits (LTNCTDs) in an accredited exchange.
LTNCTDs are instruments issued by banks to secure funds. These are denominated in pesos with a tenure of at least 5 years. LTNCTDs may be traded by one investor to another but the principal amount cannot be withdrawn during the term of the investment.
Because of this, LTNCTDs behave much like a tradable security and listing them promotes price discovery.
The new guidelines clarified that LTNCTDs must be immediately listed on an accredited exchange upon its issuance.
This move by the Monetary Board enhances transparency and nurtures the market’s discovery of the respective prices of various LTNCTDs upon their trade, the BSP said.
The new guidelines override the prior requirement of designating certain financial institutions as “market makers.” This is because the continuing discovery of prices of a listed LTNCTD is effectively the same task previously asked of market makers.
The new regulation also lengthened the period to complete the issuance of LTNCTDs released in tranches to one year from the previous 6 months.
The longer period provides banks with more flexibility to time the issuances according to their needs in consideration of changing market conditions. – Rappler.com
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