Philippine banks will soon be able to free up previously tied down capital to help them earn more during periods of stress while having to augment equity during good times when funds are aplenty, thanks to a new reform measure pushed by Bangko Sentral ng Pilipinas (BSP) Governor Nestor Espenilla Jr.
In a statement, the central bank said its Monetary Board approved the local adoption of a countercyclical capital buffer (CCyB) scheme for universal and commercial banks and their subsidiary banks and quasi-banks.
The CCyB will be complied with by the banks using their Common Equity Tier 1 (CET1) capital.
“During periods of stress, the Monetary Board can lower the countercyclical capital buffer requirement, effectively providing the affected banks with more risk capital to deploy,” the BSP said, noting this variable level of capital would be implemented using so-called tier one capital, or the funds put into the institution by common shareholders.
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Conversely, during periods of continuing expansion, the capital buffer may be raised which has the effect of setting aside capital that can be used if difficult times ensue, the central bank explained.
Espenilla noted this variable capital buffer “expands [the central bank’s] toolkit for systemic risk management and is specifically designed to provide a steadying hand to counter the common occurrence of boom-and-bust periods within the financial cycle.”
