Back when banks were actually subject to market forces and were not explicitly subjected to government capital standards, they held significantly more capital. In 1900 the average US bank capital ratio was close to 25%, now it’s closer to 5%. The trend is unmistakable: the more government has regulated bank capital, the less capital banks have ended up holding—Mark A. Calabria
Regulatory Bailout 2.0: BSP Launches Countercyclical Capital Buffer (CCyB) Intended to Ease Capital Reserves!
Lost in the din of the holiday season and the embellishment of the Philippine financial markets has been the announcement of the Bangko Sentral ng Pilipinas (BSP) to ease capital regulations of the banking system.
The Monetary Board approved the Philippine adoption of the Countercyclical Capital Buffer (CCyB) intended for universal and commercial banks (U/KBs) as well as their subsidiary banks and quasi-banks.
The CCyB will be complied with by the banks using their Common Equity Tier 1 (CET1) capital. During periods of stress, the Monetary Board can lower the CCyB requirement, effectively providing the affected banks with more risk capital to deploy. During periods of continuing expansion, the CCyB may be raised which has the effect of setting aside capital which can be used if difficult times ensue.
BSP Governor Nestor A. Espenilla Jr. noted that “the CCyB expands our toolkit for systemic risk management and is specifically designed to provide a steadying hand to counter the common occurrence of boom-and-bust periodswithin the financial cycle.”
The CCyB is set initially at a buffer of zero percent. This is in line with global practice. It also suggests that the Monetary Board does not see the ongoing build-up of credit as an imminent risk that would otherwise require an increase in the capital position of banks. The buffer, however, will be continuously reviewed by the BSP. Banks will be given a lead time of 12 months in the event that the CCyB buffer is raised. However, when the buffer is reduced, it takes effect immediately.
Designed to “counter the common occurrence of boom-and-bust periods”, the BSP essentially admitted that “boom-and-bust periods within the financial cycle” exists!
Financial bubbles, even from the BSP perspective, exists!!!
And though the BSP denies “the ongoing build-up of credit as an imminent risk”, it has taken up measures to ease capital buffers by “providing the affected banks with more risk capital”.
Or in times of stress, the BSP’s initial steps to bailout the banking system would be to lower its capital buffer/reserve requirements!
While there is no definitive evidence of a looming crisis, it is also clear that shocks that have caused dislocations of crisis proportions have come as a surprise. What is not debatable is that repricing, refinancing and repayment risks (3Rs) are escalated versus last year and this could result in systemic risk if not properly addressed in a timely manner
Pieces of the jigsaw puzzle are falling into place!
And here’s the thing.
No banks would publicly admit that they are undergoing stress. If they do, they become prone to runs.
The CCyB, thus, has been engineered as part of the BSP’s legal framework to conduct the bank bailouts in reticence or away from public scrutiny.
What would affected banks do with the release of more risk capital?
Whether the banks use such capital to do more lending or to conduct financing of its operations, well, the short answer is to provide liquidity to a bank in stress!
Figure 1
Ever since the banking system shifted to put almost all its egg in the loan portfolio, the industry’s most liquid assets continue to drain. In 2018, this phenomenon has only accelerated. [See figure 1]
The BSP’s data on the Banking System’s balance sheet and income statement can be found here and here.
Though the BSP admitted to the “occurrence of boom-and-bust periods”, it doesn’t address the possible sources here of the banking stress, except “build-up of credit”.
Why would there be a disproportionate amount of a “build-up of credit” that raises systemic risks enough for the BSP to launch CCyB?
And given the current operating conditions of the banking system, regulatory relief would translate to even more mounting “build-up of credit” in the face of less capital!
And as further proof that money printing is the only thing central banks know, the BSP ceased increasing or kept policy rates as is this week!
Figure 2
And the result? Yields of long term bonds started to creep higher!
What has been the striking is the stunning collapse in the spread between the 20-year and 6-month, 1- and 2-year notes!
The fixed income markets have been facing considerable stress!
Figure 3
And despite the stunning “compelled” serial orchestrated pushing up of the national equity index and on PSYEi 30 banks, shares of non-PSYEi 30 banks of the Bank index have barely joined the shindig! [Charts: Why the Janus-Faced Banking Stocks? PSEi Banks Versus The Rest November 26, 2018]
The question is why?
Outside mainstream ken, this would be the second major bailout by authorities channeled through the easing of the regulatory regime. In this 2nd case, again, banks would be allowed to ABSORB more risks than necessary by scaling down its capital reserves.
Again, why?
Great “boom” stuff, no?
The first regulatory bailout/relief was implemented by the Insurance Commission on Pre-Need Firms [See Insurance Commission Launches Regulatory Bailout of Pre-Need Firms, The Twin of Unbridled Fiscal Spending is High Inflation, The Coming StagflationNovember 18, 2018]
Figure 4
The reasons behind such regulatory bailout/relief reinforced by the 3Q performance of Non-Bank Quasi Banks (NBQB)
-Continuing Profit Drought (published Net income after taxes: -10.8% 3Q, -11% 2Q and -6.6% 1Q)
-Persisting Liquidity Drain (published cash and due banks: +.6% 3Q, -.8% 2Q and -1.6%) and
-Rising Distressed assets (21.3% 3Q, 20.7% 2Q and 21.2% 1Q)
Distressed assets are defined as NPLs plus ROPOA (Real and Other Properties Owned and Acquired), gross and restructured loans, current
These measures do little but to postpone and aggravate systemic maladjustments.
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