Philippine central bank sets bank stress tests for real estate

This will help determine severe shock capacity.

The central bank of the Philippines (BSP) has ordered universal, commercial, and thrift banks to conduct real estate stress tests (REST) to determine if their capital is sufficient to absorb a severe shock.

According to a research note from Maybank Kim Eng, the stress test will assume a 25 percent write-off on real estate exposure (REE) and other real estate property. Other real estate property includes real and other properties acquired (ROPA) and non-current assets held for sale.

The report also said that the new prudential REST limits require all universal, commercial, and thrift banks to meet a risk-based capital adequacy ratio (CAR) of 10 percent.

Here's more from Maybank Kim Eng:

Likewise, common equity Tier 1 ratio (CET1) should be at least 6% of qualifying capital after adjusting for the stress test results.

For stand-alone thrift banks, they should meet Tier 1 capital of 6%.

The BSP sees this new framework as a pre-emptive macro-prudential measure and does not reflect any imminent vulnerability in banks' REE.

The BSP also prefers stress tests over absolute limits so as not to affect the development of the real estate industry.

Banks can continue to expand their real estate exposures as long as their capital can absorb the risks.