Philippine Adoption of the Basel III Countercyclical Capital Buffer

, . .. r ,,,,,',- , \ BANGKO SENTRAL NG PILIPINAS OFFICE OF THE GOVERNOR CIRCULAR No. ,. o24 Series of 201.8 Subject: Philippine Adoption of the Basel 1/1 Counter cyclical Capital Buffer The Monetary Board, in its Resolution No. 2019 dated 29 November 2018, approved the Philippine adoption of the Basel 1/1 countercyclical capital buffer. Section I. . Subsection XII5. I of the Manual of Regulations for Banks (MORB) is hereby deleted and Section XII5/4/15Q of the MORB/ Manual of Regulations for Nori-Bank Financial Institutions (MORNBFl) are hereby amended and shall now read as follows: Sec. XII. 5 Basel 1/1 Risk-Based Capital. xxx These guidelines apply to all Universal Banks (UBs) and Commercial Banks (KBs) as well as their subsidiary banks and QBs. 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 (,. 0%) for both solo basis (head office plus branches) and consolidated basis (parent bank plus subsidiary financial allied undertakings, but excluding insurance companies). Other minimum capital ratios include Common Equity Tier (CET) L ratio and Tier L capital ratios of six percent (6.0%) and seven and a half percent (7.5%), respectively. With respect to the CET, . requirement, in addition to the minimum, the following capital buffers shall likewise be imposed: a. Capital conservation buffer (CCB) of two and a half percent (2.5%); and b, Counter cyclical capital buffer (CCyB) of zero percent (0%) subject to upward adjustment to a rate determined by the Monetary Board when systemic conditions warrant but not to exceed two and a half percent (2.5%). Any increase in the CCyB rate shall be effective 1.2 months after its announcement. Decreases shall be effective immediately. The prescribed ratios shall be maintained at all times. Existing capital instruments as of 31 December 2010 xxx XXX A. MabiitiSt. , Malate 1004 Manila, Philippines . (632) 7087701 . WWW. bsp. gov. ph . bspina:I@bsp. gov. ph

, .. . , ',; " . , Sec. 4, .1.5q Basel 1/1 Risk-Based Capital. xxx These guidelines apply to all Universal Banks (UBs) and Commercial Banks (KBs) as well as their subsidiary banks and QBs. The risk-based capital ratio of a QB, expressed as a percentage of qualifying capital to risk-weighted assets, shall not be less than ten percent (1.0%) for both solo basis (head office plus branches) and consolidated basis (parent QB plus subsidiary financial allied undertakings, but excluding insurance companies). Other minimum capital ratios include Common Equity Tier I ratio and Tier I capital ratios of 6.0% and 7.5%, respectively. With respect to the CETl. requirement, in addition to the minimum, the following capital buffers shall likewise be imposed: a. Capital conservation buffer (CCB) of two and a half percent (2.5%); and b. Countercyclical capital buffer (CCyB) of zero percent (0%) subject to upward adjustment to a rate determined by the Monetary Board when systemic conditions warrant but not to exceed two and a half percent (2.5%). Any increase in the CCyB rate shall be effective 1.2 months after its announcement. Decreases shall be effective immediately. The prescribed ratios shall be maintained at all times. Section 2. Subsection XI36.2 and Appendices 3,107,1.07a, and 11.4 of the MORB, and Subsection 41.36Q. 2 and Appendices Q-62 and Q-68 of the MORNBFl shall also be amended to reflect the Common Equity Tier L requirement of the countercyclical capital buffer. Subsec. XI36.2 Requirements on the declaration of dividends. xxx a. xxx; XXX d. The combined requirement for capital conservation buffer and the countercyclical capital buffer as defined in Appendix 63b, for universal and commercial banks (UBs/KBs) and their subsidiary banks and quasi-banks (QBs); XXX Subsec. 4136Q. 2. Requirements On the deci@ration of dividends/,, et dinount available for dividends. o. Requirements on the dec/orotion of dividends. xxx '') xxx;

. '.I" XXX (3) The combined requirement for capital conservation buffer and the counter cyclical capital buffer as defined in Appendix Q-46, for QBs that are subsidiaries of universal and commercial banks (UBs/KBs); XXX Appendix 3. Guidelines for the Issuance of a Universal Banking Authority for Branches of Foreign Banks I. Qualification and Documentation Requirements A. Minimum Capital Required. XXX B. Financial Resources, Past Performance and General Compliance with Banking Laws and Regulations. Applicant bank shall comply with capital adequacy ratios (Common Equity Tier I, Tier I, Capital Adequacy Ratio, and the combined requirement for the Capital Conservation Buffer and Countercyclical Capital Buffer) under Section 34 of R. A. No. 8791, Subsec. X, .05.6 and Appendix 63b, xxx XXX Appendix 1071q-62 of the MORB/MORNBFl. Framework for Dealing with Domestic Systemicallylmportant Banks. XXX Part 11. Higher Loss Absorbency (HLA) and Interaction with Other Elements of Basel 1/1 Framework. XXX 21. The HLA requirement shall be on top of the combined requirement for capital conservation buffer (CCB) and Countercyclical Capital Buffer (CCyB) under Appendix 63b/Q-46. Table 3 shows a sample total CET, . capital requirement for banks identified as DSIBs per bucket.

.. ., Table 3. Sample Total CETi. Capital Requirement when: A. CCyB rate is at O% Bucket 3IEmp, ,, 2 I Minimum CET, . Requirement (a) 6.0% 6.0% 6.0% Capital Conservation buffer (b) 2.5% 2.5% 2.5% Countercyclical Capital Buffer (c) o% O% o% DSIB HLA Requirement (d) 3.5% 2.5% 1.5% Total Additional CETi. 6.0% 5.0% 4.0% Requirement (b+c+d) Total Required CETl (a+b+c+d) 12.0% 11.0% 10.0% B. CCyB rate is at 2.5% Bucket 3IEmpt, , 2 ,. Minimum CET, . Requirement (a) 6.0% 6.0% 6.0% Capital Conservation buffer (b) 2.5% 2.5% 2.5% Countercyclical Capital Buffer (c) 2.5% 2.5% 2.5% DSIB HLA Requirement (d) 3.5% 2.5% 1.5% Total Additional CET, . 8.5% 7.5% 6.5% Requirement (b+c+d) Total Required CETl (a+b+c+d) 14.5% 13.5% 12.5% XXX 24. Capital distribution constraints shall be imposed when capital levels fall within certain range as illustrated in Table 5 below. Conversely, a DSIB shall riot be subject to any restriction on distribution if the following conditions are met: a. xxx; b. Has CET, . of more than the total required (minimum CETi. ratio of six percent [6.0%] plus the combined requirement for CCB of two and a half percent [2.5%] and the CCyB at the rate determined by the Monetary Board - zero percent 10%l to two and a half percent [2.5%], and DSIBS HLA requirement) before the distribution; and XXX

. '* Table 5. Sample Restrictions on Distributions when A, CCyB rate is at O% Level of CETl. Capital Restriction on Distributions Bucket I Bucket 2 No distribution (until the mini- < = 9.25% < = 9.75% mum CET, . requirement, the combined requirement for CCB and CCyB and more than 50% of DS!B HLA requirement are met; and conditions "a" and "c" above are complied with) 50% of earnings may be > = 9.25% - < = 9.75% - distributed (if the minimum 10.00% ,. 1.00% CETl requirement, the combined requirement for CCB and CCyB and more than 50% of DSIB HLA requirement are met; and conditions "a" and "c" above are complied with) B. CCyB rate is at 2.5% Restriction on Level of CET, . Capital Distributions Bucket I Bucket 2 No distribution (until the mini- < = ,. 1.75% < = 12.25% mum CETl requirement, the combined requirement for CCB and CCyB and more than 50% of DSIB HLA requirement are met; and conditions "a" and "c" above are complied with) 50% of earnings may be > = 11.75% to < = 12.25% to distributed (if the minimum 12.50% 13.50% CET, . requirement, the combined requirement for CCB and CCyB and more than 50% of DSIB HLA requirement are met; and conditions "a" and "c" above are complied with) XXX Appendix 1.07a. Guidelines on Recovery Plan of a Domestic Systemically Important Bank (DSIB) XXX

. . '.; ' 3.2 The recovery plan shall, at the latest, be activated when the DSIB breaches the total required Common Equity Tier I (CETl. )' capital and/or the minimum liquidity ratios as may be prescribed by the Bangko Sentral. xxx XXX I6 percent CETl. capital + 2.5 percent Capital Conservation Buffer + Countercyclical Capital Buffer at the rate determined by the Monetary Board co to 2.5 percent) + 1.5 or 2.5 percent Higher Loss Absorbency Requirement" Appendix I. ,. 41q-68. Format Certification on Compliance with Requirements on Dividend Declaration XXX We further certify that at the time of dividend declaration, the bank/QB has complied with the following: a. xxx; XXX d. The combined requirement for capital conservation buffer and the countercyclical capital buffer, as defined in Appendix 63b/Q-46 ; d'or UBs/KBs grid theirsubsidrory bunks ond QBs) XXX Section 3. Appendix 63b and Q-46 of the MORB and MORNBFl, respectively, are hereby amended to contain the guidelines on countercyclical capital buffer and include the countercyclical capital buffer in the required disclosure related to the banks' capital structure and capital adequacy. a. The guidelines on countercyclical capital buffer which shall be included in to Appendix 63b/Q-46 of the MORB/MORNBFl are contained in Attachment A. Effective Iy, the contents of the respective appendices are renumbered as follows:

. .. Contents From To Risk-Based Capital Adequacy Ra- Part I Part I tio Qualifying Capital Pa rt 11 Part 11 Capital Conservation Buffer Part 1/1 Part 1/1 Countercyclical Capital Buffer Part N Credit Risk-Weighted Assets Part N Part V Credit Derivatives Part V Part Vl Securitization P a rt Vl Part Vll Market Risk-Weighted Assets Part Vll Pa rt Vlll Operational Risk"Weighted Assets Pa rt Vl!I Part IX Disclosures in the Annual Reports P a rt IX Part X and Published Financial State- merits Enforcement Part X Pa rt XI b. Further, the required disclosures on banks' capital structure and capital adequacy shall be amended as follows: Part IX. Disclosures in the Annual Reports and Published Financial Statements I. This section lists the specific information that banks have to disclose, at a minimum, in their Annual Reports, except Item "j", paragraph 3 which should also be disclosed in banks' quarterly Published Balance Sheet. XXX A. Capital structure and capital adequacy 3. The following information with regard to banks' capital structure and capital adequacy shall be disclosed in banks' Annual Reports, except Item "j" below which should also be disclosed in banks' quarterly published Balance Sheet: a) xxx; XXX f) Countercyclical capital buffer; g) Capital requirements for credit risk (including securitization exposures); h) Capital requirements for market risk;

, . ,. .. i) Capital requirements for operational risk; and j) Total CAR, Tier I. and CET, . ratios on both solo and consolidated bases. XXX" Section 4. This Circular shall take effect 1.5 calendar days following its publication in the Official Gazette or in a newspaper of general circulation. FOR THE MONETARY BOARD: ^^;^^-^^' OC. Decomber 2018

, 4 Attachment A PART IV. COUNTERCYCLICAL CAPITAL BUFFER I. A Countercyclical Capital Buffer (CCyB) set as percent of risk-weighted assets shall be required of UBs/KBs and their subsidiary banks and quasi-banks. It shall be comprised of CETl. capital. 2. The buffer is meant to ensure that banking sector capital requirements take account of the macrofinancial environment in which banks operate. The primary aim of the countercyclical capital buffer regime is to use a buffer of capital to achieve the broader macroprudential goal of protecting the banking sector from the build-up of systemic vulnerabilities. Protecting the banking sector in this context is riot simply ensuring that individual banks remain solvent through a period of stress, as the minimum capital requirement and capital conservation buffer are together designed to fulfill this objective. Rather, the aim is to ensure that the banking sector in aggregate has the capital on hand to help maintain the flow of credit in the economy without its solvency being questioned, when the broader financial system experiences stress. 3. The counter cyclical buffer requirement will extend the size of the capital conservation buffer. The bank shall riot be subject to any restriction on distribution if the following conditions are met: a. Has positive retained earnings as of the preceding quarter and has complied with the requirements on the declaration of dividends as provided in the MORB/MORNBFl. b, Has CETi. of more than the total required (minimum CET, . ratio of 6.0 percent plus CCB of 2.5 percent plus CCyB at the rate determined by the Monetary Board) before the distribution; and c. Has complied with the minimum capital ratios (CET, . ratio of 6.0 percent, Tier I ratio of 7.5 percent and 1.0 percent CAR) after the distribution. Otherwise, the policy framework of the capital conservation buffer on the restriction on distributions shall apply, except for drawdowns. Thresholds on the restriction on distribution shall consider the CCyB requirement as an extension of the capital conservation buffer. 4. Drawdowns on the CCyB are not allowed unless the Bangko Sentral announces a decision to lower the buffer rate. The capital surplus created when the CCyB is lowered should be unfettered, i. e. , there are no restrictions on distributions when the buffer is released. 5. The uniformly applicable rate of the countercyclical buffer shall initially be set at zero percent (0%), subject to recalibration as determined by the Monetary Board. CCyB decisions shall be based on a set of indicators including, but not limited to, the credit-to-GDP gap as well as the growth and quality of credit, among others,

U , , . Attachment A 6. Any increase in the countercyclical buffer shall have a preannouncement period of twelve (12) months in consideration of the capital planning process of banks while reductions in the buffer would take effect immediately to help reduce the risk of the supply of credit being constrained by regulatory capital requirements.