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BSP to link property loans to bank capital

Published on Monday, 26 November 2012 00:00
Written by JIMMY CALAPATI [ ]

In a move to have a firmer handle on the overall real estate exposure  of banks, the Bangko Sentral ng Pilipinas (BSP) on Friday said that it is  looking at relating these exposure to banks’ capital base.

BSP deputy governor Nestor Espenilla said at the sidelines of Friday’s annual convention of the Chamber of Thrift Banks that property exposure need to be seen not just as a portion of the loan book.

The Monetary Board in August approved a new set of guidelines including investments in debt and equity securities, proceeds of which will be used in property development as part of real estate exposure.

The new measure, which supplements Circular No. 600 which is the regulatory framework for banks’ real estate exposure, amends the previous policy of excluding loans granted to individuals to finance the acquisition and/or construction of residential real estate for own-occupancy and those extended to land developers/construction companies for the development of socialized- and low-cost housing, among other things.

The new measures will take effect end of this year.

Currently, banks are tied to a 20 percent ceiling for their real estate loans.

Espenilla said that “this can then be the basis for re-visiting existing prudential limits as may be necessary.” Espenilla, however, stressed that they are not yet changing the 20 percent cap on real estate exposure.

“The limit stays,” espenilla stressed.

 “At the recent Asia Pacific Real Estate Investment Summit, we made it clear that the BSP supports the dream of every Filipino to have shelter and maintain a certain quality of life through housing. However, as a prudential regulator, the issue of shelter cannot be independent of funding and the risks that borrowing entails,” Espenilla said.

“This balance is essential to ensure that sustainability is achieved and that we avoid the mortgage debacle that happened in the US,” he added.

Espenilla earlier said that the ceiling may be changed “if necessary”.

“Actually there are many ways to do it. We can redefine the formula as calculated for one thing because right now it is the limit on the total loan portfolio for certain real estate items.” Espenilla said, adding that the changes will be based on what they will see once the banks have submitted their new computations.

“Then we have to craft the appropriate policy.  Remember, we have to balance because the economy needs to grow and the real estate is a legitimate investment area. So we do not really want to suppress it necessarily,” Espenilla said.

He said that their objective right now is to have an accurate picture to what extent in totality our banks-thrift, commercial, banking groups-are exposed to real estate.

“We will begin to get that data starting end of this year.  So the next step, once we get a better handle on the data is to analyze the data and determine whether there are more macroprudential measures we need to introduce,” Espenilla said.

Espenilla added that they would rather do “intensified monitoring rather than taking action already.”

“Vigilance, yes. Because I think if anything, a key lesson is banking crises are very often being triggered by crises in property market. So we have to take note of that lesson and not go that route,” Espenilla said.

“But again, I emphasize, we are not seeing at this point in time crisis in the property market. But I think it’s only prudent for the BSP to be vigilant and monitor things and that’s what we’re doing right now,” he added.

Earlier, Tetangco said that the new guidelines were meant to give regulators a “bigger or fuller view.”

“So the new measure would cover not only all loans to real estate.  (It will also) cover all investments in debt and equity securities the proceeds of which will ultimately finance the needs of real estate companies,” Tetangco said.

Tetangco explained that there are some forms of funding that go to the real estate sector that do not come in the form of loans like investment in securities.

The proceeds of some of these also are used by the real estate companies.

Analaysts are concerned that, with the low interest rates and increase in capital flows, there might be some asset price inflation.

But the BSP said that in terms of the total loan portfolio, banks’ exposure to real estate remains below the 20 percent limit.

For purposes of determining a bank’s exposure under the new rules, real estate activities shall refer to the construction and development of real estate projects as well as other ancillary services like buying and selling, rental and management of real estate properties.

Also, consistent with sound risk management practices which espouse the maintenance by a bank of adequate capital that is commensurate to its risks, a bank’s real estate exposure shall be referenced against its adjusted capital, similar to other prudential limits such as the single borrower’s loan limit.

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