Utilization of Basel III Capital and Liquidity Buffers

OFFICE OF THE DEPUTY GOVERNOR FINANCIAL SUPERVISION SECTOR MEMORANDUM NO. M-2020-039 To : All Universal and Commercial Banks and their Subsidiary Banks and Quasi-Banks Subject : Utilization of Basel III Capital and Liquidity Buffers Universal and commercial banks (U/KBs), and their subsidiary banks and quasi- banks (QBs), are required to maintain regulatory capital and liquidity buffers under the Basel III risk-based capital adequacy and liquidity framework. These buffers are meant to be used to absorb shocks during periods of stress. Owing to the BSP’s adoption of the Basel III risk-based capital and liquidity standards, covered banks/QBs are largely seen to have entered the Corona Virus Disease (COVID-19) situation in the country with strong capital buffers and ample liquidity position to absorb potential shocks. In this connection, a covered bank/QB which has built up its capital conservation buffer1 and Liquidity Coverage Ratio (LCR)2 buffer is allowed to utilize the same during this state of health emergency. The use of the buffers is in line with the objective of the BSP’s prudential framework; thus, the BSP encourages a covered bank/QB to act along this principle for purposes of absorbing losses and supporting the financing requirements of the overall economy. In view of this, a covered bank/QB is expected to integrate these regulatory flexibilities into its internal policies and processes to ensure that the buffers are efficiently utilized, as necessary. 1. Capital Conservation Buffer A covered bank/QB which draws down its 2.5 percent minimum capital conservation buffer will not be considered in breach of the Basel III risk-based capital adequacy framework. A covered bank/QB that utilizes its capital conservation buffer is restricted from making distributions in the form of dividends, profit remittance, in the case of a foreign bank branch, share buybacks, discretionary payments on other Tier 1 capital instruments, or discretionary bonus payments to staff, consistent with the provisions of Appendix 59/Q-45 of the MORB/MORNBFI. 1 Section 125/125-Q and Appendix 59/Q-45 of the Manual of Regulations for Banks (MORB)/Manual of Regulations for Non-Bank Financial Institutions (MORNBFI). 2 Section 145/145-Q and Appendix 72/Q-82 of the MORB/MORNBFI. A. Mabini St., Malate 1004 Manila, Philippines ● (632) 8708-7701 ● www.bsp.gov.ph ● [email protected]

2. Liquidity Coverage Ratio A covered bank/QB may draw on its stock of liquid assets to meet liquidity demands to respond to the current circumstances, even if this may cause the covered bank/QB to maintain an LCR that is below the 100 percent minimum requirement. A covered bank/QB that has recorded a shortfall in the stock of its High-Quality Liquid Assets for three (3) banking days within any two (2) - week rolling calendar period, thereby causing the LCR to fall below the 100 percent must notify the BSP of such a breach on the banking day immediately following the occurrence of the third liquidity shortfall. Covered banks/QBs will be given a reasonable time period to restore their Basel III capital conservation and liquidity buffers after the COVID-19 crisis. On a related matter, non-compliance by a covered bank/QB with the minimum risk-based capital adequacy ratios and the minimum 100 percent Net Stable Funding Ratio as a result of the COVID-19 situation will be handled on a case-by-case basis by the BSP. A covered bank/QB will be provided by the BSP with enough time to address regulatory breaches taking into account a forward-looking assessment of macroeconomic and financial conditions of the system as a whole and their potential impact on the supervised institution. For guidance. CHUCHI G. FONACIER Deputy Governor 04 May 2020