Proportionality in Banking Regulations: The Case of the Philippines. CHUCHI G. FONACIER Deputy Governor Bangko Sentral ng Pilipinas

Transcription

1 Proportionality in Banking Regulations: The Case of the Philippines CHUCHI G. FONACIER Deputy Governor Bangko Sentral ng Pilipinas

2 Philippine Banking System Asset Size, in billions ( ) 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 6,132 6,541 7,194 8,997 13,763 12,302 10,895 10,070 Universal/Commercial Banks (UKBs) Thrift Banks (TBs) RCBs As of end-december 2017, universal and commercial banks hold the largest share of the banking system s total assets at 90.7 percent while thrift banks and rural/coop banks accounted for only 7.8 percent and 1.5 percent shares, respectively Source : Supervisory Data Center, Supervision and Examination Sector, BSP Banking system recorded a network of 587 head office as of end-december Rural/coop banks are the more popular type of banks in the rural communities with 489 offices. Universal/commercial banks and thrift banks with 43 and 55 offices, respectively No. of Offices (Head Office Only 1 ) ( ) Excludes other offices such as branches UKBs TBs RCBs Source : Supervisory Data Center, Supervision and Examination Sector, BSP 2

3 Proportionality in Banking Regulations A supervisory approach that is commensurate with the financial institution s risk profile and systemic importance. Simpler standards but without compromising regulatory objectives. Systemic Importance Size Operational Complexity Risk Exposures Scale Products & Services LEVEL OF COMPLEXITY OF BANKS

4 Bank Segmentation Prudential Requirements Business Model and Risk Profile Simple banks Complex banks Compliance with corporate governance, risk management and regulatory disclosure standards Bank Segmentation Affiliation Thrift and rural banks that are subsidiaries of universal and commercial banks Stand-alone thrift Compliance with the Basel III capital and liquidity standards Prudential reporting requirements and rural banks

5 Bank Segmentation Based on Business Model and Risk Profile Compliance with corporate governance, risk management and regulatory disclosure standards Philippine Banks Simple Complex Thrift Banks (TBs) Universal Banks Rural Banks (RBs) Commercial Banks Cooperative Banks TBs, RBs and Coop Banks can be considered as complex if at least 3 of the following characteristics exists: Total assets of at least P6 billion Extensive branch network Non-traditional financial products and services Use of non-conventional business model Business strategy characterized by aggressive risk appetite and increasing risk exposure

6 Key Characteristics and Risk Issues Risk Issues Complex Banks Simple Banks Governance Financial conglomerate Related party transactions issues Family-owned and closely-held Basic management issues Operational Risk/ Internal Control/ Bank Security Comprehensive policies and procedures supported by risk management systems, internal controls and reporting systems Operational risk issues trigger system concerns Small and closely related manpower complement Reliance on character rather than systems and processes Manual-based systems and processes Exposure to risks events such as typhoons and natural calamities Credit Risk With sufficient resources and competent talent pool capable of developing sophisticated models and tools for managing credit risks Liquidity Risk Various funding sources (e.g., interbank, liquid assets) Stronger parent support Bank closure entails higher cost Lack of capacity to develop credit scoring and loan loss estimation models Preferential lending to related parties Limited sources of funding in locality Closure of a bank affects liquidity 6

7 Prudential Regulatory Framework Governance Landscape Corporate Governance Fitness and Propriety of BOD and SM Management of Key Risk Areas Duties and Responsibilities of BOD and SM Credit Related Party Transactions Liquidity Operational Compliance/Internal Audit REGULATORY CAPITAL Bank Protection/ Security Risk REPORTING GOVERNANCE - FINANCIAL REPORTING INFORMATION TECHNOLOGY FRAMEWORK

8 Calibrated Corporate Governance Governance Standards Complex Banks Simple Banks Board of Directors Composition At least 1/3 but not less than two (2) members of the Board as Independent Director At least one Independent Director Board-Level Committees Three (3) board-level committees: Audit Committee Corporate Governance Committee Risk Oversight Committee Audit Committee Universal and commercial banks that are part of a conglomerate are required to create a Related Party Transactions Committee 8

9 Flexibility in Management Structures but with Safeguards Key Risk Areas Complex Banks Simple Banks Internal Audit Internal Auditor (with stricter qualification criteria) Internal Auditor (with simpler qualification criteria) Compliance Risk Full-time Chief Compliance Officer Full-time Chief Compliance Officer (CCO) or Internal Auditor may serve as the CCO in a concurrent capacity Risk Governance Chief Risk Officer to lead the Risk Management Function Chief Risk Officer (CRO), or Qualified Senior Officer can be designated as CRO Corporate governance and risk management discussed at the Board level Operational Risk Operational Risk Management Function Operational risk issues discussed by the Board during their meetings Security Risk Full-time Chief Security Officer Chief Security Officer (CSO), or Qualified Senior Officer may concurrently act as the CSO, provided that such designation does not result to a conflict of interest Business Continuity Business Continuity Management (BCM) Unit Individual Business Continuity Management (BCM) Coordinator Concurrency for certain positions is allowed, provided that designated officer is qualified and the Board of Directors play a more active role in these areas

10 Appropriate Risk Management Guidelines Key Risk Areas Complex Banks Simple Banks Credit Risk Sound loan loss methodology that can reasonably estimate expected loan loss provisions in a timely manner Subject to simplified but more stringent loan loss provisioning guidelines Liquidity Risk Dynamic approaches and a range of techniques that factor future changes in their activities and impact of these changes on the bank s balance sheet Static approach to liquidity management. Static models are based on positions at a given point in time. This may consist of a cash flow projection in a spread sheet where the bank s sources and uses of funds is analyzed based on contractual or maturity Operational Risk Utilize more sophisticated tools in identifying and assessing operational risk exposures. These may include but need not be limited to the following: risk self assessments scenario analysis business process mapping model measurement In identifying and assessing operational risk exposures, banks are expected to adopt at a minimum, the results of internal/external audit and supervisory issues raised in the BSP Report of Examination and internal loss data collection analysis

11 Appropriate Risk Management Guidelines Key Risk Areas Complex Banks Simple Banks Information Technology IT oversight function is delegated to an IT Steering Committee, or its equivalent Internal Audit to perform IT audit support (e.g., independent assessment of technology risk management process and IT control) The Board of Directors or Senior Management should appoint an Information Security Officer who shall be responsible and accountable for the organization-wide Information System program Oversight shall be performed by the Board of Directors In case there is no in-house IT audit expert available, the external specialist and auditors of other institutions may perform the IT audit support The Information Security Officer (ISO) function may be assigned to an existing independent officer that have sufficient knowledge, background and training Stress Testing Methodologies that could be employed may be sensitivity analysis, scenario analysis and reverse stress test. Required to report the results of the stress testing that were undertaken to the BSP on an annual basis as part of the Internal Capital Adequacy Assessment Process document. Use of simple sensitivity analysis covering credit, liquidity and operational risks. Results available upon request 11

12 Structured Minimum Capitalization Bank Category Simple Banks Complex Banks Head Office in National Capital Region Head Office Only P 50 million P 500 million P 2.00 billion P 3.00 billion Up to 10 branches 75 million 750 million 4.00 billion 6.00 billion 11 to 50 branches 100 million 1.00 billion billion billion 50 to 100 branches 200 million 2.00 billion More than 100 branches billion billion Head Office in All Other Areas Outside NCR 1/ Head Office Only P 20 million P 200 million Up to 10 branches 30 million 300 million 11 to 50 branches 40 million 400 million More than 50 branches 80 million 800 million 1/ Required minimum capitalization for rural and coop banks in cities up to 3 rd class municipalities. The required minimum capitalization for 4 th class to 6 th class municipalities is lower. Required Minimum Capitalization Rural and Coop Banks Thrift Banks Commercial Banks Universal Banks

13 Bank Segmentation Based on Affiliation Compliance with the Basel III capital and liquidity standards Prudential reporting requirements.thrift and rural banks that are subsidiaries of universal and commercial banks are required to comply with the Basel III capital and liquidity standards, similar to their parent bank.stand-alone thrift and rural banks as well as cooperative banks are subject to a simpler framework The Basel standards as well as prudential reports are required to be complied with on both solo- and consolidated basis. 13

14 Segmented Basel Regulatory Capital Framework Basel Reform Agenda Thrift, rural and cooperative banks that are subsidiaries of universal and commercial banks Stand-alone thrift, rural and cooperative banks Regulatory Capital Basel III (10% minimum CAR) Basel 1.5 (10% minimum CAR) Leverage Basel III Not Applied Minimum Capital Requirements (Pillar 1) TOTAL QUALIFYING CAPITAL - Basel-III compliant, except for the adoption of the capital conservation buffer and the countercyclical capital buffer. CREDIT RISK CAPITAL CHARGE - Risk-weighted assets (Basel I guidelines) plus: 50 % risk weight for FCY denominated credit exposure to Philippine National Government (NG) and BSP in line with credit risk rating of the country; and 150 % risk weight for NPLs and foreclosed assets. MARKET RISK CAPITAL CHARGE Not applicable OPERATIONAL RISK CAPITAL CHARGE -- 12% of the average positive annual gross income during the last 3 years of a bank. Supervisory Review Process (Pillar 2) CAPITAL PLANNING PROCESS Market Discipline (Pillar 3) REQUIRED MINIMUM DISCLOSURES: Components of qualifying capital Capital requirements for credit, market and operational risks Total and Tier 1 capital adequacy ratios.

15 Differentiated Liquidity Metrics Basel Reform Agenda Liquidity Metrics Thrift, rural and cooperative banks that are subsidiaries of universal and commercial banks Basel III Liquidity Coverage Ratio Basel III Net Stable Funding Ratio Stand-alone thrift, rural and cooperative banks Minimum Liquidity Ratio (MLR) MLR Stock of Liquid Assets Total Qualifying Liabilities : A prudential MLR of 20% shall apply on an ongoing basis. : Stock of Liquid Assets Total Qualifying Liabilities : Cash on Hand Reserves in the BSP Overnight and Term Deposits with the BSP Sovereign debt securities (NG and BSP) Other debt securities assigned a zero percent risk weight Deposits in other banks (should be immediately liquefiable and free from lien) : Total Liabilities Irrevocable obligations

16 Proportionate Reporting Governance Framework Business Model Basic Lending and Deposit-taking Operations Expanded Banking Activities Microfinance Operations E-Money Issuer Derivatives Trust Operations Credit Card Business FCDU Operations Stand-alone rural and cooperative banks Simplified Financial Reporting Package Balance Sheet, Income Statement and simplified supporting schedules (50% of full FRP) Simplified Basel Capital Adequacy Report Additional licensing requirements Higher risk management standards Additional reportorial requirements 11 Prudential Reports Rural and cooperative banks that are subsidiaries of universal and commercial banks Full Financial Reporting Package Balance Sheet, Income Statement and supporting schedules Basel III Capital Adequacy Report Expansion in banking activities translate to higher prudential requirements

17 Concluding Points Proportionality in banking regulations promotes: Continuing soundness and stability of banking system Convergence of regulatory and business objectives Efficient allocation of supervisory resources Broad-based inclusive growth and innovation 17

18 Proportionality in Banking Regulations: The Case of the Philippines CHUCHI G. FONACIER Deputy Governor Bangko Sentral ng Pilipinas