Risk-Based Capital Adequacy Framework in the Philippines

Implementation of Basel III

On 15 January 2013, the Bangko Sentral ng Pilipinas (BSP) released Circular No. 781 which provides
the implementing guidelines on the revised risk-based capital adequacy framework particularly on the
minimum capital and disclosure requirements. The new framework which took effect in 2014 is
applicable to all universal and commercial banks (U/KBs) and their subsidiary banks and quasi-banks.
This framework allowed a reasonable transition period for banks to comply with the new minimum
requirements. While the international rules allow staggered implementation, the BSP adopted the capital
reforms in full, in recognition of the strong capital position of the banking industry.

The BSP implements new minimum capital ratios of 6.0 percent Common Equity Tier 1 (CET1) ratio, 7.5
percent Tier 1 ratio and 10.0 percent Total Capital Adequacy Ratio (CAR). A capital conservation buffer
(CCB) of 2.5 percent, comprised of CET1 capital was also prescribed.

In recognition of the distinct structure of foreign bank branches (FBBs) which operate under the U/KB
license, a calibrated Basel III framework was issued under Circular No. 822 dated 13 December 2014.
The reform highlighted the role of Permanently Assigned Capital which is the CET1 equivalent for FBBs.
Shortly after, R.A. No. 10641 amending R.A. No. 7721, was approved to further liberalize the entry of
foreign banks. To implement this law, the BSP issued Circular No. 858 dated 21 November 2014,
providing the new capital computation for FBBs.

In October 2014, Circular No. 856 Basel III Framework for Dealing with Domestic Systemically
Important Banks (DSIBs) was issued to address systemic risk and interconnectedness by identifying
banks which are deemed systemically important within the domestic banking industry. Minimum buffers
composed of CET1 capital shall be required of systemically important banks starting January 2017.

Implementation of Basel II

BSP Circular No. 538 dated 4 August 2006 contains the implementing guidelines on the revised risk-
based capital adequacy framework for the Philippine banking system to conform with Basel II
recommendation. The guidelines which took effect on 1 July 2007 provide the approaches that may be
used in computing the regulatory capital requirements for credit, market and operational risks (Pillar
I), as well as additional supervisory information which needs to be disclosed to the public (Pillar III).

To address the second pillar, the BSP issued Circular No. 639 on 15 January 2009. This took effect on
1 January 2011 and was made applicable to U/KBs at a consolidated level only. Circular No. 639
contains the guiding principles that (1) banks should follow in designing their Internal Capital Adequacy
Assessment Process (ICAAP), and (2) BSP supervision and examination personnel should consider in
assessing a bank’s ICAAP, engaging the bank in an ICAAP-dialogue, and proposing prudential
measures, if deemed necessary. On 28 July 2011, the BSP came up with supplemental guidelines on
the ICAAP submission of Philippine branches of foreign banks which was embodied in Circular No. 731
dated 28 July 2011. The ICAAP submissions of Philippine foreign bank branches are expected to be
designed in accordance with the nature, size and complexity of their businesses in the Philippines.

Implementation of Basel 1.5

Stand-alone thrift banks (TBs), rural banks (RBs) and cooperative banks (Coop Banks), which refer to
TBs, RBs and Coop Banks that are not subsidiaries of U/KBs, are covered by a separate risk-based
capital adequacy framework referred to by the BSP as the Basel 1.5 framework which is a simplified
version of Basel II in view of the simple operations of these covered banks. The implementing
guidelines of Basel 1.5 are contained in Circular No. 688 dated 26 May 2010 which took effect on 1
January 2012.

Originating Circulars of Current Risk-Based Capital Adequacy Frameworks

Basel III

Basel III Implementing Guidelines on Minimum Capital

Circular No. 781 01.15.2013
Requirements

Basel II

Revised Risk-Based Capital Adequacy Framework For

Circular No. 538 08.04.2006 Universal and Commercial Banks and their Subsidiary Banks
and Quasi-banks

Basel 1.5

Revised Risk-Based Capital Adequacy Framework For Stand-

Circular No. 688 05.26.2010
Alone Thrift Banks, Rural Banks and Cooperative Banks

Basel I

Guidelines on the adoption of the risk-based capital adequacy

Circular No. 400 09.01.2003
framework by stand-alone quasi-banks
Guidelines on the adoption in the Philippines of the risk-based
Circular No. 280 03.29.2001 capital adequacy framework pursuant the General Banking
Law of 2000(superseded by Circular No. 688)
Regulations
Republic Acts (RA) and Implementing Rules and Regulations (IRR) of RAs.

R.A. No. Date Description

04
An Act Instituting A Foreign Currency Deposit System In The Philippines,
R.A. 6426 Apr
and For Other Purposes
1972
R.A. 3591, as An act establishing the Philippine Deposit Insurance Corporation (PDIC
amended Charter)
02 An Act Providing for the Creation, Organization and Operation of
R.A. 7353 Apr
1992 Rural Banks, and For Other Purposes
10
R.A. 7653 Jun The New Central Bank Act
1993
18
An Act liberalizing the entry and scope of operations of foreign banks in the
R.A. 7721 May
Philippines and for other purposes
1994
23
An Act providing for the regulation of the organization and operation of
R.A. 7906 Feb
Thrift Banks, and for other purposes
1995
21 An Act liberalizing the Philippine investment house industry, amending
R.A. 8366 Oct certain sections of Presidential Decree No. 129, as amended, otherwise
1997 known as "The Investment Houses Law"
21
R.A. 8367 Oct Revised Non-Stock Savings and Loan Association Act of 1997
1997
26
An Act amending R.A. 5980, as amended, otherwise known as the
R.A. 8556 Feb
Financing Companu Act
1998

12 General Banking Law of 2000, an act providing for the regulation of

R.A. 8791 Apr the organization and operations of banks, quasi-banks, trust entities
2000 and for other purposes
29
R.A. 9160 Sep Anti-Money Laundering Act of 2001
2001
13 An Act to promote the establishment of Barangay Micro Business
R.A. 9178 Nov Enterprises (BMBEs), providing incentives and benefits therefor, and for
2002 other purposes
18 An act granting tax exemptions and fee privileges to special purpose
R.A. 9182 Dec vehicles which acquire or invest in non-performing assets, setting the
2002 regulatory framework therefore, and for other purposes
19
R.A. 9182
Mar Implementing Rules and Regulations of R.A. 9182
IRR
2003
 07
An act amending Republic Act No. 9160, otherwise known as the "Anti-
R.A. 9194 Mar
Money Laundering Act of 2001"
2003
06
R.A. 9194
Aug Implementing Rules and Regulations of R.A. 9194
IRR
2003
An Act amending certain sections of the National Internal Revenue Code of
1997, as amended, by excluding several services from the coverage of the
5 Feb
R.A. 9238 value-added tax and re-imposing the gross receipts tax on banks and non-
2004
bank financial intermediaries performing quasi-banking functions and other
non-bank financial intermediaries beginning January 01, 2004
28 An Act restoring the tax exemption of OBUs and FCDUs, amending for the
R.A. 9294 Apr purpose Section 27 (D) and Section 28, Paragraphs (A) (4) and (A) (7) (b)
2004 of the National Internal Revenue Code as amended.
22
An Act Establishing a Provident Personal Savings Plan, known as the
R.A. 9505 Aug
Personal Equity and Retirement Account (PERA)
2008
21
R.A. 9505 IRR Oct Implementing Rules and Regulations of R.A. 9505
2009
23
An Act Providing for an Agriculture and Agrarian Reform Credit and
R.A. 10000 Feb
Financing System Through Banking Institutions
2010
14 Jul
R.A. 10000 IRR Implementing Rules and Regulations of R.A. 10000
2011
An Act to Further Strengthen the Anti-Money Laundering Law, Amending
18
for the Purpose Sections 10 and 11 of Republic Act No. 9160, Otherwise
R.A. 10167 Jun
Known as the "Anti-Money Laundering Act of 2001", as Amended, and for
2012
Other Purposes
18
An Act Defining the Crime of Financing of Terrorism, Providing Penalties
R.A. 10168 Jun
Therefor and for Other Purposes
2012
24
R.A. 10574 May An Act Allowing the Infusion of Foreign Equity in the Capital of Rural Banks
2013
15
An Act allowing the full entry of foreign banks in the Philippines, amending
R.A. 10641 July
for the purpose Republic Act No. 7721
2015
Amendments to 03
the IRR of RA July Amendments to the IRR of RA 1000
1000 2018
30
R.A. 11127 Oct The National Payment Systems Act
2018
14
An Act Amending Republic Act Number 7653, Otherwise Known As "The
R.A. 11211 Feb
New Central Bank Act",
2019
Source: http://www.bsp.gov.ph/regulations/RAs.asp
Presidential Decrees (PDs)

P.D. No. Date Description

29 Jan
P.D. 114 Regulating the establishment and operation of pawnshops
1973
15 Feb Governing the establishment, operation and regulation of Investment
P.D. 129
1973 Houses
Batas 01 Apr An Act Amending PD 129 Presidential Decree No. 129, As Amended,
Pambansa 66 1980 Otherwise Known as "The Investment Houses Law"
30 Sep Authorizing the establishment of an offshore banking system in the
P.D. 1034
1976 Philippines
30 Sep Expanding the Authority of Certain Depository Banks Under R.A. No.
P.D. 1035
1976 6426 and for Other Purposes
21 Nov Further Amending Certain Provisions of Republic Act Numbered 6426, as
P.D. 1246
1977 Amended by Presidential Decree Numbered 1035
06 Jan Amending furhter Presidential Decree No. 129, as amended, otherwise
P.D. 1797
1981 known as “The Investment Houses Law.”
Source: http://www.bsp.gov.ph/regulations/PDs.asp