Risk-Based Capital Adequacy Framework in the Philippines
Implementation of Basel II
The Bangko Sentral ng Pilipinas has completed the adoption of the Basel II framework for all universal and commercial banks (U/KBs) and their subsidiary banks and quasi-banks on both solo and consolidated bases.
It should be recalled that the three pillars of Basel II are (1) Minimum Capital Requirements, (2) Supervisory Review Process, and (3) Market Discipline. The first and third pillars were implemented through the issuance of Circular No. 538 dated 4 August 2006 which took effect on 1 July 2007. The said guidelines prescribe the menu of approaches that may be used in computing the regulatory capital requirements for credit, market and operational risks, as well as additional supervisory information which needs to be disclosed to the public under 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.
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