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21 December 2009
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Philippine central bank defers risk coverage rule to 2011

The Philippine central bank, locally known as Bangko Sentral ng Pilipinas (BSP) has decided to defer by a year the implementation of a new set of capital requirements for banks that were supposed to take effect starting January 2010, reported Philippines Daily Inquirer.

“We extended the effectivity of circular 639. Banks need more time to consult with the BSP and they need to refine their reports,” BSP Deputy Governor Nestor Espenilla Jr. told reporters.

Circular 639 is the implementing regulation on the Internal Capital Adequacy Assessment Process (ICAAP). Under the ICAAP, banks will be required to provide sufficient capital—or other resources—to cover non-traditional types of risks involved in operating a bank.

These include reputation risk, strategic risks, interest rate risks, compliance risks, liquidity risks, and credit concentration risks.

Currently, banks are only required to provide capital cover for common types of risks, mainly credit risk, which is the risk of borrowers defaulting on their loans.

The circular, which will now take effect in January 2011, states that banks must submit to the BSP a detailed report indicating all the risks it is exposed to, quantify these risks, determine the amount of capital they think is sufficient to cover for all these risks, and raise the required capital.

Espenilla said the circular would encourage banks to exercise discipline and determine on their own what needs to be done to improve their financial health.

Earlier, Espenilla said banks were so far on track in submitting their reports to the BSP by January. However, it turned out that some banks still needed to consult with the BSP in drafting their reports.

The ICAAP is one of the advanced regulatory measures under the Basel 2 accord, an enhanced regulatory framework agreed upon by central banks and bank regulators around the world. The objective of the accord is to strengthen the banking and financial sector globally, thereby make economies more resilient to shocks.

The Philippines was one of the few countries attempting to be among the firsts to adopt the ICAAP. In Southeast Asia, only Hong Kong has implemented it so far. Other countries where ICAAP is already observed are New Zealand and Australia.

According to the central bank’s definition, reputation risks are generally bad news about a bank that could create financial trouble. Bad news had a tendency to encourage depositors to pull their money out of a bank. Given this, the BSP said banks would be required to put up sufficient capital cover for reputation risks.

Strategic risks, meanwhile, are those that arise from changes in the market environment, while interest rate risks are those that threaten a bank’s level of liquidity due to sharp movements in interest rates.

Compliance risks are those resulting from a bank’s failure to comply with some of the reportorial and other requirements of the BSP. Non-compliance with BSP regulations entail payment of penalties.


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