PRUDENTIAL regulations to beef up the banks’ strength and resiliency pushed lending rates upward in 2018, according to a recent study conducted by the Bangko Sentral ng Pilipinas (BSP).

In a recent report on the impact of prudential regulations on bank lending rates, the BSP noted that on average, the cost of doing business by local banks had gone up following the adoption of recent bank regulations and prudential reforms.

Two of the more recent prudential regulations under the Basel III framework—the international standards for banking regulations —include the increase in risk-based capital and the new framework on liqudity coverage ratio.

In particular, the BSP required banks to maintain risk-based capital—expressed as a percentage of qualifying capital to risk-weighted assets—at no less than 10 percent for both solo and consolidated bases. The regulation took effect in January 2014.

The BSP also implemented the new liquidity coverage ratio (LCR). This required banks to maintain, over a 30-calendar day horizon, an adequate level of unencumbered high-quality liquid assets consisting of cash or assets that can be converted into cash at little or no loss of value in private markets, to offset potential cash outflows under a potential liquidity stress scenario. The regulation’s phased implementation started in January 2018.

Latest findings from the Central Bank showed that regulator requirements implemented under the Basel III accord resulted in additional costs for banks, which translated to higher lending rates for 2018.

Banks’ lending rates increased by 0.2 percent for every 1-percent increase in their capital adequacy ratio (CAR).

Lending rates also increased by 0.04 percent for every 5-percent increase in a bank’s LCR.

“This indicates that the BSP’s actions entail some necessary costs, albeit modest, to ensure the safety, soundness and resilience of the banking system,” the BSP said.

The study also concluded that the increases in bank lending rates are “marginal” in nature but will still be considered in the implementation of the next regulatory reform to be implemented.

“The findings also indicate that banks are rebalancing their portfolio in response to the prudential regulations,” the Central Bank said.  “However, future policy studies may consider similar analysis to estimate the impact of other Basel III prudential regulations and other BSP policy measures such as policy rate hike on supervised financial institutions’ balance sheets,” it added.  The BSP earlier reported that the local banking economy grew alongside the domestic economy, with banks, at their core, expanding resources in 2018 at a much faster rate of 9.3 percent year-on-year.

“The relatively sound and stable condition of the Philippine Banking System [PBS]—a product not only of prudent regulation and risk-based supervision, but of earnest cooperation from the sector itself—is a key anchor of the growing economy,” the BSP said.