Amendments to the Guidelines on the Computation of Required Capital

Bexero SerurnaL No PlulptNns OFFICE OF THE GOVERNOR CIRCUTAR NO. 1Q27 Series of 2018 Subject: Amendments to the Guidelines on the Computation of Required Capital The Monetary Board, in its Resolution No. 2093 dated 14 December 2018, approved the amendments to the guidelines on the computation of required capital as embodied under Sections X111 and XL28, Subsections X105.4 and X105.G, and Appendix 53b of the Manual of Regulations for Banks (MORB) as well as Sections 4111e and 4137Q, Appendix Q-46 and Subsection 4LLLT.L of the Manual of Regulations for Non- Bank Financial Institutions (MORNBFt). Section 1. The manner of computation of capital as defined in Section X111 of the MORB shall be applicable to all domestic banks and foreign bank subsidiaries. Section X11L of the MORB is hereby amended to read, as follows: Section X111 (200&X106). Definition of Capital. The following provisions shall govern the capital requirements for banks. The term copifol shall be synonymous to unimpaired copitol and surplus, combined capitol accounts and net worth and shall refer to the total of the unimpaired paid-in capital, surplus, and undivided profits. For this purpose, the following items shall likewise be added to or deducted from capital: a. Deposits for stock subscription recognized as equity pursuant to Section X128 shall be added to capital. b. The following shall be deducted from capital: (1) Treasury stock; (2) Unbooked allowance for probable losses (which inctudes allowance for credit losses and impairment losses) and other capital adjustments as may be required by the Bangko Sentral; (3) Total outstanding unsecured credit accommodations, both direct and indirect, to directors, officers, stockholders, and their related interests (DOSRt) granted by the bank proper; (41 Total outstanding unsecured loans, other credit accommodations and guarantees granted to subsidiaries; (5) Total outstanding loans, other credit accommodations and guarantees granted to related parties, as defined in ltem "n", subsection X141.1, A. h..labirrSr.. Lra;ale -i0L1.l Manila, philippines . {63217OS.7701 .,,vww.bsp.gcv.Frh . 5rornu ,, sp.gcv.ph

that are not at arm's length terms as determined by the appropriate supervising department of the Bangko Sentral; t5) Deferred tax assets that rely on future profitability of the bank to be realized, net of any (a) allowance for impairment and (b) associated deferred tax liability, if the conditions cited in pAs 12 on Income Taxes are met: Provided, That, if the resulting figure is a net deferred tax liability, such excess cannot be added to net worth; (71 Reciprocal investment in equity of other banks/enterprises, whether foreign or domestic, the deduction shall be the lower of the investment of the bank or the reciprocal investment of the other bank or enterprise; and (8) ln the case of RBs/coop Banks, the government counterpart equity, except that arising from conversion of arrearages under the Bangko Sentral rehabilitation program. with respect to ltem 'b.Ff'hereof, the provision in subsec. X326.1 shall apply except that in the definition of stockholders in said Subsection, the quafification that his stockholdings, individually and/or together with his related interest in the lending bank, should at least amount to two percent (2%l or more of the total subscribed capital stock of the bank, shall not apply for the purpose of this Item. Section 2. The manner of computation of capital as defined in Subsections X105.4.b and X105.6 of the MORB shall be applicable to foreign bank branches. Subsections X105.4 and X105.5 of the MORB are hereby amended to read, as follows: Subsection X105.4 (2(X}8-X12l.a). Capital rcquirements of foreign banks. a. For locally incorporated subsidiaries. XXX b. For foreign bank branches (1) xxx (2) For purposes of compliance with minimum capital regulations, the term "capitol of o foreign bonk bronch" shall refer to the sum of: (a) permanently assigned capital, (b) undivided profits, and (c) accumulated net earnings, which is composed of unremitted profits not yet cleared by the Bangko Sentral for outward remittance and losses in operations, net of applicable capital adjustments enumerated in Section X111. (3) xxx

(a) Any Net due from head office, branches and subsidiaries outside the Philippines, excluding accumulated net earnings, shall be deducted from capital. (5) xxx xxx Subsection X105.6 (2m8-X121.6) Risk-based capital for foreign bank branch. a. Foreign bank branches shall comply with the same risk-based capital adequacy ratios applicable to domestic banks of the same category. b. xxx c. Any Nef due from head office, branches and subsidiaries outside the Philippines, excluding accumulated net earnings shall be deducted from CETl capital. d. The guidelines for computing the risk-based capital adequacy ratios are provided in Appendix 63b. Section 3. Section 4111Q of the MORNBFI on minimum required capitalization of quasi-banks is hereby amended to read as follows: Sec. 411 lQ (2008-4106Q) Minimum Req uired Ca pita lization. a. Definition of copital. The term copitol shall be synonymous to unimpoired copital ond surplus, combined capitol occounts and nef worth and shall refer to the total of the unimpaired paid-in capital, surplus, and undivided profits. For this purpose, the following items shall likewise be added to or deducted from capital: (1) Deposits for stock subscription recognized as equity pursuant to Section 4137Q shall be added to capital. {2) The following shall be deducted from capital: (a) Treasurystock; (b) Unbooked allowance for probable losses (which includes allowance for credit losses and impairment losses) and other capital adjustments as may be required by the Bangko Sentral; {c) Total outstanding unsecured credit accommodations, both direct and indirect, to directors, officers, stockholders and their related interests (DOSRI)granted by the QB; (d) Total outstanding unsecured loans, other credit accommodations and guarantees granted to subsidiaries;

(e) Total outstanding loans, other credit accommodations and guarantees granted to related parties, as defined in ltem "o", Section 4002Q of the MORNBFI, that are not at arm's len4h terms as determined by the appropriate supervising department of the Bangko Sentral; and (f) Deferred tax assets that rely on future profitability of the QB to be realized, net of any (1) allowance for impairment and (2) associated deferred tax liability, if the conditions cited in PAS 12 on Income Taxes are met: Provided, That, if the resulting figure is a net deferred tax liability, such excess cannot be added to net worth. With respect to ltem "(21(cl" hereof, the provisions of Sec. 4325Q shall apply except that in the definition of stockholders in Subsec. 4326Q.1, the qualification that his stockholdings, individually and/or together with his related interests in the lending QB, amount to ten percent (10%) or more of the total subscribed capital stock of the QB, shall not apply for purposes of this ltem. b. Required capitol. A QB shall have a minimum capital of P300.0 million. Section 4. Subsection 4111T.1 of the MORNBFI on the capital build-up program of trust corporations is hereby amended to read as follows: Subsection 4tj,lT.t Capital build-up prognm. Upon incorporation/establishment, a TC may have an initial minimum paid-in capital of P100 million and xxx. xxx For purposes of this Section, combined copitol occounts shall mean the total capital stock, retained earnings, and profit and loss summary, net of (a) unbooked allowance for probable losses (which includes allowance for credit losses and impairment losses) on the allowable proprietary assets and (b) such other capital adjustments as may be required by the Bangko sentral. Section 5. Sections XI28/4L37e of the MORB/MORNBFI on deposits for stock subscription is hereby amended to read as follows: Sections Xl28l4t37Q Deposits for Stock Subscription. Deposits for stock subscription refer to payments made by existing stockholders or new subscribers of the bank/QB on subscription to the increase in the authorized capital, which may be recognized either as a liability or equity. Deposits for stock subscription shall be recognized as part of equity for prudential reporting purposes when all of the following conditions are met:

a. xxx xxx d. The bank/QB has filed an application for the amendment of its articles of incorporation for the increase in authorized capital with the appropriate supervising department of the Bangko sentral, duly supported by complete documents as prescribed by the Bangko Sentral: Provided, That the approval of the Securities and Exchange Commission (SEC) on the same application shall be obtained within the period prescribed under the SEC Financial Reporting Bulletin on Deposit for Future Subscription. In case the applications for the amendment of articles of incorporation for the increase in authorized capital have been returned due to insufficienry of supporting documents, the deposit for stock subscription shall not qualify for recognition as an equity instrument; and e. xxx xxx Section 6. Paragraph 11 of Part ll of Appendix 63b/Q-46 of the MORB/MORNBFI on Quafifying Capital under Basel lll Risk-Based Capital (Section X]-LS|4LI!Q of the MORB/MORNBFI) is hereby amended, as follows: Part ll. Qualifying capital xxx Section B. Branches of Forcign Banks CET1 Capital XXX Regulatory adiustments to CET1 capital 11. The regulatory adjustments to cETl capital are provided in paragraph 4, as applicable. n addition, the Net due from head office, branches and subsidiaries outside f the Philippines, excluding accumulated net earnings shall be deducted from CET1 capital. XXX

Section 7. Effeaivity. This Circular shall take effect fifteen (15) calendar days after its publication either in the Official Gazette or in a newspaper of general circulation. FORTHE MONETARY BOARD: ffi.r L{oec^ber 2018