No threat ...

• Borrowers’ Interconnectedness Index or BII, which will determine the systemic importance of a borrower in the banking system based on a defined quantitative measure.

Based on the FSR – a report that BSP intends to release every year – these three measures are “transformational” in that it will ensure that credit will be utilized “within prudential norms.”

The CCyB, for example, is the “stressed time” counterpart of the Capital Conservation Buffer, which was introduced as early as 2014. “With the CCyB, the credit market is meant to be prevented from drying up during not-so-good times while also providing a means to curb credit growth if it is deemed as expanding at ‘too-strong’ a pace,” said the BSP.

DEBT, on the other hand, is a stress test that is similar to the REST test. It basically evaluates the debt servicing capacity of bank borrowers under the hypothetical scenario of higher interest rates and/or a depreciation of the peso, the BSP explained.

“While banks are expected to have determined the repayment capacity of their borrowers before the loan was approved, what DEBT contributes is setting a common threshold for debt payments under stressed market prices,” said the BSP. It added that “having the common threshold as a percentage of the income of borrowers – which is proposed to be 60 percent in this case – makes DEBT a prudential tool for systemic risk purposes (as it) essentially sets an informal buffer for the downside risk that market rates provide against the borrower at a time that the loan is being repriced, repaid or refinanced.”

The BII, said the BSP, is for the loan portfolio of each bank and it will determine whether the credit market in the aggregate has exposures that are concentrated to certain borrowers. In short, it will “quantify if there are systemically important borrowers.” (LCC)