THE Bangko Sentral ng Pilipinas (BSP) is imposing a new framework for calculating banks’ operational risk capital charges, requiring them to factor in their financial activities and historical losses.
The new framework is scheduled for implementation beginning with the end-December 2027 reporting period, when covered financial institutions must incorporate the new methodology into their quarterly Capital Adequacy Ratio reports.
Under Circular 1241, the central bank adopted the Basel III New Standardized Approach for computing operational risk capital charges for universal, commercial and digital banks, including their subsidiary banks and quasi-banks.
“The new framework introduces a more risk-sensitive approach to determining banks’ capital requirements for operational risk,” BSP Deputy Governor Lyn Javier told The Manila Times in a Viber message.
“It recognizes differences in banks’ business models, size and operations, and takes into account their actual income and operational loss experience,” she added.
Under the new rules, banks will calculate their operational risk capital charges using a Business Indicator, a Business Indicator Component and an Internal Loss Multiplier.
Javier said this allows for a “more appropriate alignment” of capital requirements with the risks that banks face.
“For banks that may benefit from lower capital requirements under the new framework, the capital released can be used to support additional lending activities, while maintaining adequate buffers against operational risks,” Javier said.
The new framework assigns different marginal coefficients according to the size of a bank’s Business Indicator.
Institutions with a Business Indicator of up to P3 billion will use a 12-percent coefficient, while those with indicators exceeding P3 billion but not more than P30 billion will apply a 15-percent coefficient.
Banks with indicators above P30 billion will use an 18-percent coefficient for the applicable portion of the calculation.
The Business Indicator Component is also adjusted upward by a factor of 1.25 under the framework.
The Internal Loss Multiplier, meanwhile, will reflect a bank’s average annual operational losses over a 10-year observation period.
The rules require the use of high-quality historical loss data, supported by documented procedures, independent validation and regular reviews.
Banks with historical losses higher than their Business Indicator Component may face a higher operational risk capital charge.
Conversely, those with losses lower than the component may have a lower charge under the methodology.
The multiplier is set at one when the Loss Component and Business Indicator Component are equal. Banks that do not meet the prescribed criteria for historical loss data must also apply a multiplier of one.
However, the central bank said they may require a multiplier greater than one if it identifies material deficiencies in a bank’s internal controls, systems or processes that affect its loss data, or if a higher multiplier is warranted as part of supervisory enforcement or corrective action.
Rizal Commercial Banking Corp. chief economist Michael Ricafort said the new framework would help banks be better prepared, as part of contingency and stress-test or scenario planning.
“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,” Ricafort said.
“Any needed preparations would prevent and mitigate these operational risks accordingly,” he added.
