By L. W. T. Noble, October 14 2019; Business World

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THE BANGKO SENTRAL ng Pilipinas (BSP) has enhanced its framework for watching banks deemed too big to fail, the monetary authority said in a press release on Saturday.

The BSP said the approved “enhancements” to its framework for watching domestic systemically important banks (D-SIBs) are designed to better determine how important a bank is to the health of the financial system.

The new features which the BSP’s Monetary Board has approved include adoption of threshold levels and other revisions to weights of indicators and their composition, as well as calibration of additional capital requirement.

These changes are applied both on a consolidated basis on all universal and commercial banks, as well as their subsidiary banks and quasi banks, as well as branches of foreign lenders.

Initial guidelines for D-SIBs were released in October 2014.

A bank is considered “systematically important” if — because of its size — its distress or failure would disrupt the domestic financial system and threaten general economic activity.

Apart from requiring such banks to have bigger capital, they are also subject to closer supervision and are required to have a recovery plan that addresses the risk they pose to the financial system and the entire economy.

Under the revised framework, a bank’s systemic importance is gauged according to indicators for size, interconnectedness, substitutability and complexity. Among these four indicators, size and interconnectedness bear the greater weight “as these factors are more critical… in determining a bank’s systemic importance in the Philippines, taking into consideration the simple structure of the Philippine financial system,” the BSP said in its news statement.

D-SIBs are then identified based on overall scores against certain thresholds.

Depending on their degree of systemic importance, such banks are categorized into higher loss absorbency groupings and will be required to raise their minimum common equity tier 1 (CET1) capital by 1.5-2.5% of total risk-weighted assets. This, the BSP said, “aims to bolster resilience of D-SIBs”. This requirement will be on top of the existing CET1 minimum, capital conservation buffer and countercyclical capital buffer (an extension of the capital conservation buffer) required of all universal and commercial banks, as well as their subsidiary banks and quasi-banks.

“Failure to meet the foregoing regulatory minimum will subject the bank to constraints in the distribution of their income,” the central bank said. — L. W. T. Noble