JERMY Y. PRENIO Head, Task Force on the Implementation of Basel II Bangko Sentral ng Pilipinas

1. BSP’s Basel II Implementation JERMY Y. PRENIO Head, Task Force on the Implementation of Basel II Bangko Sentral ng Pilipinas 5th SEACEN Seminar on Preparations for Implementation of Basel II 13-15 March 2008 Bali, Indonesia

2. Background Preparations for Basel II New Risk-Based Capital Adequacy Framework in the Philippines Work Going Forward Presentation Outline

3. Background Adopted Basel I through the issuance of: Circular 280 (2001) capital requirements for credit risk Circular 360 (2002) capital requirements for market risk Circular 400 (2003) capital requirements for credit risk for quasi-banks

4. Regulatory framework Corporate governance Legal framework Capacity building Market infrastructure Awareness Preparations for Basel II

5. Preparations for Basel II Regulatory framework • Enhanced compliance with the Basel Core Principles • Issued guidelines for recognition and derecognition of external rating agencies for supervisory purposes • Issuance of various regulations that gradually adopted the Basel II elements • Lower risk weighting for highly-rated sovereigns and banks • Lower risk weighting for qualified MSME portfolio • Lower risk weighting for highly-rated corporates • Higher risk weighting for non-performing loans

6. Preparations for Basel II Corporate governance • Fit and proper rule for bank directors and officers • Director education program • Compliance function

7. Preparations for Basel II Legal framework • BSP continues to lobby changes in its charter, including the inclusion of provisions necessary for effective Basel II adoption: • Differentiated capital adequacy requirement for banks • Consolidated supervision • Problem bank resolution • Prompt corrective action • Enhanced legal protection for supervisory personnel

8. Preparations for Basel II Capacity building • Structured training program • Improved MIS • Electronic reports • Data warehousing • Early Warning System

9. Preparations for Basel II Market infrastructure • Development of the domestic credit ratings industry • Establishment of a comprehensive domestic credit bureau • Establishment of a Fixed Income Exchange

10. Preparations for Basel II Awareness • Active participation in international meetings/exercises • Held Basel II for a and workshops for supervisory personnel and banks • Active participation of BSP representatives in the BAP Risk Management Committee • Issuance of the official Basel II implementation plan of the BSP as early as 2004.

11. Preparations for Basel II Awareness • Successive issuances/activities relating to Basel II implementation • Exposure draft of the Implementing Guidelines in April 2005 • Final Implementing Guidelines in August 2006 • Conduct of the parallel run from 4Q 2006 to 2Q 2007 • Required banks to submit Basel II implementation plans by end-2006

12. New Risk-Based Capital Adequacy Framework in the Philippines THE THREE PILLARS Supervisory Review Process (Pillar 2) Market Discipline (Pillar 3) Minimum Capital Requirements (Pillar 1)

13. New Risk-Based Capital Adequacy Framework in the Philippines BASEL II Universal Banks Commercial Banks Subsidiaries: Banks /Quasi-Banks

14. New Risk-Based Capital Adequacy Framework in the Philippines 2010 1 July 2007

15. New Risk-Based Capital Adequacy Framework in the Philippines Pillar 1 • granular mapping of external credit risk ratings to capital requirements • specific capital requirements for credit derivatives, securitization exposures, counterparty risk in the trading book, and operational risk • imposition of a capital requirement on foreign currency denominated credit exposures to the Philippine National Government (implemented on a staggered basis) • recognition of more types of financial collateral and guarantees for purposes of mitigating the credit risk exposures of banks • higher capital requirement for real and other properties acquired (ROPA). 

16. New Risk-Based Capital Adequacy Framework in the Philippines Pillar 1 • Deviations from Basel II • Minimum CAR of 10% vs. Basel II’s 8% • 100% risk weight for unrated banks vs Basel II’s 50% (under Option2) • 50% risk weight for housing loans vs. Basel II’s 35% • 75% risk weight for qualified MSME portfolio only vs. Basel II’s 75% risk weight for qualified retail portfolio

17. New Risk-Based Capital Adequacy Framework in the Philippines Pillar 2 • Not included in the current implementing guidelines • ICAAP guidelines exposed to the industry in November 2007 • CAMELS, Risk Assessment System, Prompt Corrective Action frameworks currently being revised • The goal is to incorporate the ICAAP in the examination procedures and reflect the outcome in the CAMELS rating

18. New Risk-Based Capital Adequacy Framework in the Philippines Pillar 3 • Expanded list of items that banks need to disclose in their Annual Reports and in their quarterly published statement of condition. • Disclosure requirements support the existing disclosure regulations.  It is also aimed to empower the market so it can reward banks that manage risk effectively and penalize those whose risk management is imprudent. • It relate to banks’ (a) capital structure and adequacy, and (b) risk management policies and processes and risk exposures, specifically on credit risk, market risk, operational risk.

19. Work Going Forward • Implementation of the ICAAP framework • Implementation of the advanced approaches in the future

20. Thank Youjprenio@bsp.gov.ph