Bangko Sentral ng Pilipinas, the Philippines’ central bank, approved stricter capitalization standards on Monday for foreign bank branches operating in the country.
Under the new framework, which is designed to align the country’s capital structure with Basel III framework, foreign banks are required to hold Tier 1 capital primarily composed of permanently assigned capital.
The previous framework allowed foreign banks operating in the Philippines to hold Tier 1 capital comprised of both PAC and net due to foreign head offices. “Net Due To”—which primarily reflects transactions between the bank branch and its parent company—will be re-classified as Tier 2 capital.
Foreign bank branches are required to meet all required capital ratios, including six percent Tier 1 Common Equity, 7.5 percent Tier 1 ratio and 2.5 percent capital buffer, before January 1, 2015, though the central bank will require the bank branches to submit capital plans by April 1.
“This new initiative strengthens foreign bank branches in the Philippines because they will have their capital onshore when they take on onshore risks,” BSP Governor Amando M. Tetangco said. “[This is] prudent policy direction since it will reduce unwarranted reliance of foreign bank branches on their parent entity for capital support when operating domestically.”