(NAR) VOL. 12 NO. 2 / JANUARY - MARCH 2001
"Sec. X116 Minimum Ratio - The risk-based capital ratio of a bank, expressed as a percentage of qualifying capital to risk-weighted assets, shall not be less than ten percent (10%) for both solo basis (head office plus branches) and consolidated basis (parent bank plus subsidiary financial allied undertakings, but excluding insurance companies).a. For on-balance sheet assets, the risk-weighted amount shall be the product of the book value of asset multiplied by the risk weight associated with that asset, as follows:
The ratio shall be maintained daily
§ X 116 1 Qualifying Capital - The qualifying capital shall be the sum of --
a. Tier 1 (core) capital -Provided, further, That the following items shall be deducted from the total of Tier 1 capital:
- Paid-up common stock;
- Paid-up perpetual and non-cumulative preferred stock;
- Common stock dividends distributable;
- Perpetual and non-cumulative preferred stock dividends distributable;
- Surplus;
- Surplus reserves;
- Undivided profits (for domestic banks only); and
- Minority interest in the equity of subsidiary financial allied undertakings which are less than wholly-owned: Provided, That a bank shall not use minority interests in the equity accounts of consolidated subsidiaries as avenue for introducing into its capital structure elements that might not otherwise qualify as Tier 1 capital or that would, in effect, result in an excessive reliance on preferred stock within Tier 1:
b. Tier 2 (supplementary) capital which shall be the sum of-
- Common stock treasury shares,
- Perpetual and non-cumulative preferred stock treasury shares;
- Net unrealized losses on underwritten listed equity securities purchased;
- Unbooked valuation reserves and other capital adjustments based on the latest report of examination as approved by the Monetary Board;
- Total outstanding unsecured credit accommodations, both direct and indirect, to directors, officers, stockholders and their related interests (DOSRI);
- Deferred income tax; and
- Goodwill; and
b. 1 Upper Tier 2 capital-i. It must not be secured nor covered by a guarantee of the issuer or related party
- Paid-up perpetual and cumulative preferred stock;
- Paid-up limited life redeemable preferred stock;
- Perpetual and cumulative preferred stock dividends distributable.
- Limited life redeemable preferred stock dividends distributable,
- Appraisal increment reserve - bank premises, as authorized by the Monetary Board;
- Net unrealized gains on underwritten listed equity securities purchased. Provided, That the amount thereof that may be included in upper Tier 2 capital shall be subject to a 55% discount,
- General loan loss provision Provided. That the amount thereof that may be included in upper Tier 2 capital shall be limited to a maximum of 1 25% of gross risk-weighted assets and any amount in excess thereof shall be deducted from the total risk weighted assets in computing the denominator of the risk-based capital ratio;
- With prior BSP approval, unsecured subordinated debt with a minimum original maturity of at least ten (10) years, subject to the following conditions
ii. It must be subordinated in the right of payment of principal and interest to all depositors and other creditors of the bank, except those creditors expressed to rank equally with, or behind holders of the debt. Subordinated creditors must waive their right to set off any amounts they owe the bank against subordinated amounts owed to them by the bank. The issue documentation must clearly state that the debt is subordinated;
iii. It must be fully paid-up. Only the net proceeds actually received from debt issues can be included as capital. If the debt is issued at a premium, the premium cannot be counted as part of capital,
iv. It must not be redeemable at the initiative of the holder;
v. It must not contain any clause which requires acceleration of payment of principal, except in the event of insolvency;
vi. It must not be repayable prior to maturity without the prior consent of the BSP; Provided, that repayment may be allowed only if --
- The bank's capital ratio is at least equal to the required minimum capital ratio; and
- The debt is simultaneously replaced with issues of new capital which is neither smaller in size nor of lower quality than the original issue;
vii. It may allow a moderate step-up in the interest rate in conjunction with a call option, only if the step-up occurs at a minimum of five (5) years after the issue date and if it results in an increase over the initial rate that is not more than 100 basis points or 50% of the initial credit spread, provided that only one (1) rate step up shall be allowed over the life of the instrument;
viii. It must provide for possible conversion into common shares or preferred shares or possible deferral of payment of principal and interest if bank's capital ratio becomes less than the required minimum capital ratio;
ix. It must provide for the principal and interest on the debt to absorb losses where the bank would not otherwise be solvent',
x. it must allow deferment of interest payment on the debt in the event of, and at the same time as, the elimination of dividends on all outstanding common or preferred stock of the issuer. It is acceptable for the deferred interest to bear interest, but the interest rate payable on deferred interest should not exceed market rates;
xi It must be underwritten by a third party not related to the issuer bank nor acting in reciprocity for and in behalf of the issuer bank;
xii. It must be issued in minimum denominations of at least five hundred thousand pesos (P500.000 00) or its equivalent: and
xiii. It must clearly state on its face that it is not a deposit and is not insured by the Philippine Deposit Insurance Corporation (PDIC); "
Provided, that it shall be subject to a cumulative discount factor of 20% per year during the last five (5) years to maturity (i.e., 20% if the remaining life is 3 years to less than 40% if the remaining life is 3 years to less than 4 years, etc.): Provided, further, That where it is denominated in a foreign currency, it shall be revalued periodically (at least monthly) in Philippine peso at prevailing exchange rate using the same exchange rate used for revaluation of foreign currency-denominated assets, liabilities and forward contracts under existing regulations: Provided, furthermore, That, for purposes of reserve requirement regulation, it shall not be treated as time deposit liability, deposit substitute liability or other forms of borrowings;
9. Deposit for common stock subscription; and
10. Deposit for perpetual and non-cumulative preferred stock subscription;
Provided, That the following items shall be deducted from the total of upper Tier 2 capital:
1. Perpetual and cumulative preferred stock treasury shares;
2. Limited life redeemable preferred stock treasury shares; and
3. Sinking fund for redemption of limited life redeemable preferred stock; and
b.2 Lower Tier 2 capital -
1. Unsecured subordinated debt with a minimum original maturity of at least five (5) years, subject to the following conditions;
i. It must not be secured nor covered by a guarantee of the issuer or related party;
ii. It must be subordinated in the right of payment of principal and interest to all depositors and other creditors of the bank, except those creditors expressed to rank equally with, or behind holders of the debt Subordinated creditors must waive their right to set off any amounts they owe the bank against subordinated amounts owed to them by the bank. The issue documentation must clearly state that the debt is subordinated;
iii. It must be fully paid-up. Only the net proceeds actually received from debt issues can be included as capital. If the debt is issued at a premium, the premium cannot be counted as part of capital;
iv. It must not be redeemable at the initiative of the holder;
v. It must not contain any clause which requires acceleration of payment of principal, except in the event of insolvency;
vi. It must not be repayable prior to maturity without the prior consent of the BSP: Provided, That repayment may be allowed only if --- The bank's capital ratio is at least equal to the required minimum capital ratio;vii. It may allow a moderate step-up in the interest rate in conjunction with a call option, only if the step-up occurs at a minimum of five (5) years after the issue date and if it results in an increase over the initial rate that is not more than 100 basis points or 50% of the initial credit spread, provided that only one (1) rate step up shall be allowed over the life of the instrument;
and
- The debt is simultaneously replaced with issue of new capital which is neither smaller in size nor of lower quality than the original issue;
viii. It must be underwritten by a third party not related to the issuer bank nor .acting in reciprocity for and in behalf of the issuer bank;
ix. lt must be issued in minimum denominations of at least five hundred thousand pesos (P500.000.00) or its equivalent; and
x. it must clearly state on its face that it is not a deposit and is not insured by the -Philippine Deposit Insurance Corporation (PDIC):
Provided, further. That it shall be subject to a cumulative discount factor of 20% per year during the last five (5) years to maturity (i.e., 20% if the remaining life is 4 years to less than 5 years, 40% if the remaining life is 3 years to less than 4 years, etc): Provided, furthermore, That where it is denominated in a foreign Currency, it shall be revalued periodically (at least monthly) in Philippine peso using the same exchange rate used for revaluation of foreign currency-denominated assets, liabilities and forward contracts under existing regulations; Provided, furthermore, That, for purposes of reserve requirement regulation, it not be treated as equivalent to a time deposit liability, deposit substitute or other forms of borrowings;2. Deposit for perpetual and cumulative preferred stock subscription; andProvided, That the total amount of lower Tier 2 capital that may be included in the Tier 2 capita! shall be limited to a maximum of 25% of total Tier 1 capital (net of deductions therefrom): Provided, further, That the total amount of upper and lower Tier 2 capital that may be included in the qualifying capital shall be limited to a maximum of 50% of total Tier 1 capital (net of deductions therefrom);
3. Deposit for limited life redeemable preferred stock subscription;
c. Less deductions from the total of Tier 1 and Tier 2 capital, as follows:1. Investments in equity of unconsolidated subsidiary banks and other financial allied undertakings, but excluding insurance companies;Provided, That any asset deducted from the qualifying capital in computing the numerator of the risk-based capital ratio shall not be included in the risk-weighted assets in computing the denominator of the ratio.
2. Investments in debt capital instruments of unconsolidated subsidiary banks;
3. Investments in equity of subsidiary insurance companies and non-financial allied undertakings; and
4. Reciprocal investments in equity and debt capital instruments of other banks ' enterprises:
For foreign bank branches, Tier 1 capital elements shall consist of -
1. Assigned capital; and
2. Net due "to" head office, branches, subsidiaries and other offices outside the Philippines (inclusive of earnings not remitted to head office per Subsec X121.5.C), less the same deductions from Tier 1 capital of domestic banks: Provided, That the amount of "Net due to account" shall be limited to an amount prescribed under Subsec. X121.6: Provided, further, That should there be any "Net due from account", the same shall be deducted from the Tier 1 capital."
§X116.2 Risk-Weighted Assets - The risk-weighted assets shall be determined by assigning risk weights to amounts of on-balance sheet assets and to credit equivalent amounts of off-balance sheet items (inclusive of derivative contracts): Provided, That the following shall be deducted from the total risk-weighted assets:
1. General loan loss provision (in excess of the amount permitted to be included in upper Tier 2 capital); and
2. Unbooked valuation reserves and other capital adjustments affecting asset accounts based on the latest report of examination as approved by the Monetary Board.
0% risk weight -20% risk weight -
1. Cash on hand;
2 Claims on or portions of claims guaranteed by or collateralized by securities issued byi. Philippine national government and BSP; and3. Loans to the extent covered by hold-out on, or assignment of deposits/deposit substitutes maintained with lending bank;
ii Central governments and central banks of foreign countries with the highest credit quality as defined in Subsec. X116.3;
4. Loans or acceptances under letters of credit to the extent covered by margin deposits,
5. Portions of special time deposit loans covered by Industrial Guarantee and Loan Fund (IGLF) guarantee,
6. Real estate mortgage loans to the extent guaranteed by the Home Guaranty Corporation (HGC);
7. Loans to the extent guaranteed by the Trade and Investment Development Corporation of the Philippines (TIDCORP).
8. Loans to exporters to the extent guaranteed by the Government Fund for Small and Medium Enterprises (GFSME),
9 Foreign currency notes and coins on hand acceptable as international reserves: and
10 .Gold bullion held either in own vaults, or in another s vaults on an allocated basis, to the extent it is offset by gold bullion liabilities;
Second, the credit equivalent amount shall be treated like any on-balance sheet asset and shall be assigned the appropriate risk weight, i.e., according to the obligor, or if relevant, the qualified guarantor or the nature of collateral.
- Inward bills for collection,
- Outward bills for collection;
- Items held for safekeeping/custodianship;
- Trust department accounts
- Late deposits/payments received
- Items held as collaterals;
- Traveler's checks; etc
The current credit exposure shall be the positive mark-to-market value of the contract (or zero if the mark -to-market value is zero or negative) The potential future credit exposure shall be the product of the notional principal amount of contract multiplied by the appropriate potential future credit conversion factor, as indicated below
- Instruments which are traded on exchange where they are subject to daily receipt and payment of cash variation margin, and
- Exchange rate contracts with original maturity of 14 calendar days or less
Provided, That for contracts with multiple exchanges of principal, the factors are to be multiplied by the number of remaining payments in the contract: Provided, further, That for contracts that are structured to settle outstanding exposure following specified payment dates and where the terms are reset such that the market value of the contract is zero on these specified dates, the residual maturity would be set equal to the time until the next reset date, and in the case of interest rate contracts with remaining maturities of more than one (1) year that meet these criteria, the potential future credit conversion factor is subject to a floor of five tenths percent (0.5%): Provided, furthermore, That no potential future credit exposure shall be calculated for single currency floating/floating interest rate swaps, i.e., the credit exposure on these contracts would be evaluated solely on the basis of their mark-to-market value.
Residual Maturity Interest Rate Contract Exchange Rate Contract One (1) year or less 0.0% 1 0% Over one (1) year to five (5) years 0.5% 5.0% Over five (5) years 1.5% 7.5%
Rating Agency | Highest Rating |
1. Moody's | “Aa3" and above |
2. Standard and Poor's | “AA-“ and above |
3. Fitch IBCA | “AA-“ and above |
4. Others as may be approved by the Monetary Board |
§ X116.4 Required Reports - Banks shall submit a report of their risk-based capital ratio on a solo basis (head office plus branches) monthly and on a consolidated basis (parent bank plus subsidiary financial allied undertakings, but excluding insurance companies) quarterly to the appropriate supervising and examining department of the BSP in the attached prescribed forms within the deadlines, i.e., 15 banking days after end of reference month and 30 banking days after the end of the reference quarter, respectively.This Circular shall take effect on 1 July 2001. Banks shall, however, be required to submit trial reports using the new report format commencing on end-April 2001 report until the effectivity of this Circular.
§ X116.5 Sanctions - Whenever the capital accounts of a bank are deficient with respect to the prescribed net worth to risk assets ratio, the Monetary Board after considering a report of the appropriate supervising and examining department of the BSP on the state of solvency of the institution concerned, shall limit or prohibit the distribution of the net profits and shall require that part or all of net profits be used to increase the capital accounts of the bank until the minimum requirement has been met. The Monetary Board may restrict or prohibit the making of new investments of any sort by the bank, with the exception of purchases of readily marketable evidences of indebtedness issued by the Philippine national government and BSP included in Item a(2) i of Subsec. X116.2, until the minimum requirement capital ratio has been restored."
§ X116.6 Temporary Relief - In case of a bank merger, or consolidation, or when a bank is under rehabilitation under a program approved by the BSP, the Monetary Board may temporarily relieve the surviving bank, consolidated bank, or constituent bank or corporations under rehabilitation from full compliance with the required capital ratio for a maximum period of one (1) year."