BSP Implements New Capital Framework for Banks: Aligning with Basel III Standards

The Bangko Sentral ng Pilipinas (BSP) has announced the adoption of the Basel III New Standardized Approach (NSA) for operational risk capital requirements for banks. The framework, outlined in BSP Circular No. 1241, will be implemented starting with the end-December 2027 reporting period, requiring banks to incorporate the new methodology into their quarterly Capital Adequacy Ratio (CAR) reports.

BSP Deputy Governor Lyn Javier said the NSA introduces a more risk-sensitive approach to determining capital requirements, recognizing differences in banks’ business models, sizes, and operations, and taking into account their actual income and operational loss experience.

The revised methodology mandates that banks calculate their operational risk capital charges using a combination of a Business Indicator, a Business Indicator Component, and an Internal Loss Multiplier. The Business Indicator reflects a bank's financial activities, while the Internal Loss Multiplier reflects a bank’s average annual operational losses over a 10-year observation period. This methodology allows for a more appropriate alignment of capital requirements with the risks banks face.

“The new framework recognizes differences in banks’ business models, size and operations, and takes into account their actual income and operational loss experience.”Lyn Javier, BSP Deputy Governor

Under the new rules, banks with a Business Indicator of up to PHP 3 billion will apply a 12-percent coefficient, those with indicators exceeding PHP 3 billion but not more than PHP 30 billion will use a 15-percent coefficient, and banks with indicators above PHP 30 billion will utilize an 18-percent coefficient for the applicable portion of their calculations. This tiered system allows for a nuanced assessment of capital needs based on the size and risk profile of each institution.

The BSP emphasized that operational risks refer to potential losses arising from inadequate or failed internal processes, people, systems, or external events, including cyberattacks, fraud, human error, technology failures, and natural calamities.

“It is increasingly important for banks to have buffers amid emerging and evolving operational risk factors as a matter of prudence to continuously ensure a sound and stable banking system.”Michael Ricafort, Chief Economist, Rizal Commercial Banking Corp.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said the new framework would help banks prepare for emerging operational risks as part of contingency and stress-test planning. He noted the importance of banks having buffers amid emerging and evolving operational risk factors as a matter of prudence to ensure a sound and stable banking system.

As part of the transition to the NSA, banks will undergo a monitoring period during which they must submit parallel CAR reports under both the existing methodologies and the new NSA. This dual reporting will allow for a smoother transition and ensure compliance with minimum capital requirements.

The full implementation of the NSA-based quarterly CAR reports will begin with the end-December 2027 reporting period. Covered financial institutions that demonstrate readiness may adopt the NSA earlier during the monitoring period, subject to prior notification to the BSP and supervisory post-verification.