BSP to Implement Stress Test on Banks’ Real Estate Exposure

Manila– Banks will now have to undergo stress test to determine their ability to cover their exposure to the real estate sector.

This after Bangko Sentral ng Pilipinas’ (BSP) policy-making Monetary Board (MB) recently approved the implementation of a pre-emptive macro-prudential policy measure in a bid to ensure that banks have sufficient coverage for their real estate credit exposure.

In a statement, the central bank said this measure “does not reflect any imminent vulnerability among banks’ with exposure to the real estate sector.”

”Instead the measure simply reinforces the prudential policy that banks must have sufficient capital to absorb any possible shocks on its credit exposures.”

Under the new measure, universal and commercial banks (U/KBs) and thrift banks (TBs) have to meet the 10 percent regulatory requirement for qualifying capital after they have been put under the stress test.

Also, these banks should have a Common Equity Tier 1 that is at least six percent of their qualifying capital after the test.

Similarly, stand alone TBs has to have a Tier 1 ratio that accounts to six percent of their qualifying capital.

Banks that fail to meet the requirements need to formally explain before the regulators why they should not face corrective actions.

If the BSP is not satisfied with the explanation it will send the financial institution a notice to submit within 30 calendar days an action plan that will enable it to meet the regulatory requirements.

The BSP said the Board okayed the implementation of the stress test in line with the international standards set under the Basel Accord.

”These stress tests are also preferred over absolute limits because they do not prejudice the development of the real estate industry. Instead, banks can have greater exposures to real estate for as long as they manifest their increased ability to absorb these risks vis-à-vis their capital position,” it pointed out.

BSP said the Board approved the implementation of this rule while taking into consideration the social agenda of providing shelter as a basic need.

It also said that the new macro-prudential measure “recognizes the continuing growth of the real estate industry in line with the national demographic factors.”

”Nonetheless, the MB believes that this is an opportune time to introduce such measure so that banks will be appropriately guided by the policy direction,” it added. (PNA) JBP/JS/UTB