BSP Issues Guidance for Digital Banks and Environmental & Social Risks

With respect to regulating the digital banks, the Monetary Board of BSP approved the second set of guidelines for digital banks, following the release of the digital bank framework in December 2020. BSP published the Circular 1195 on these prudential requirements and amendments to relevant provisions of the Manual of Regulations for Banks and Non-Bank Financial Institutions and Manual of Regulations on Foreign Exchange Transactions. The second set of guidelines set out supervisory expectations on corporate and risk governance of digital banks as well as the applicable prudential regulations on capital, leverage, and liquidity. The guidelines also prescribe the prudential limits on equity investments in allied undertakings, required reserves against deposit and deposit substitute liabilities, and reporting requirements of digital banks. Digital banks are considered as complex banks; thus, the governance expectations, Basel III standards, and prudential reporting requirements applicable to universal and commercial banks shall also apply to digital banks. The new rules provide that BSP may require existing thrift, rural, and cooperative banks to maintain a minimum capital of P1.0 billion if the said banks primarily offer financial products and services that are processed through a digital platform and/or electronic channels similar to digital banks. The concerned banks shall be given ample time to build up capital and meet the new minimum capital requirement. So far, BSP has authorized six digital banks to operate in the Philippines: GoTyme Bank Corporation, Maya Bank, Inc, Overseas Filipino Bank Inc, A Digital Bank of LANDBANK, Tonik Digital Bank Inc, UnionDigital Bank Inc, and UNObank Inc.  

The credit risk measure recently extended by BSP aims to encourage lending and provide prudential relief via a relaxation in the credit risk-weight for loans to micro, small and medium enterprises (MSMEs), under the Basel capital adequacy framework. The Memorandum No. M-2022-041 is amending Memorandum No. M-2022-004 to read as follows: "The following exposures to MSMEs, as defined under the Basel III Risk-Based Capital Adequacy Framework1 and the Basel 1.5 Risk-Based Capital Adequacy Framework shall be assigned a credit risk weight of 50 percent: (a) MSME exposures that meet the criteria of a qualified MSME portfolio and (b) Current MSME exposures that do not qualify as a highly diversified MSME portfolio. The provisions on the use of credit risk mitigation under Appendix 59/Q-45 of the Manual of Regulations for Banks (MORB)/Manual of Regulations for Non-Bank Financial Institutions (MORNBFI) as well as claims with eligible collateral or guarantees under Appendix 62 of the MORB shall continue to apply. The foregoing provisions shall apply until June 30, 2023. 

The regulatory sandbox framework, which the Monetary Board recently approved, formalizes the Test and Learn (T&L) approach, a system that allows BSP Supervised Financial Institutions (BSFIs), third-party service providers of BSFIs, and new players to offer financial products and services using new technology to a limited number of customers in a controlled environment. Under the framework, each sandbox shall undergo a four-stage process of Application, Evaluation, Testing, and Exit Stages. The sandbox project will run for 12 months and after the said period BSP will determine whether the sandboxed product/service is "fit for broader or mass adoption." Insights from the regulatory sandbox projects will inform the development of policies necessary to regulate the activities within and around new or emerging financial solutions. Applicants for regulatory sandbox experiments may also be advised to use a simplified approach known as the "Regulatory Sandbox Lite," which runs on a shorter timeline. This approach is only available to those involved in financial products or services that are already within the scope of existing regulations.

The guidance on implementation of the Environmental and Social Risk Management (ESRM) system for banks aims to inform banks on the initial steps or approaches that may be considered in developing an ESRM system. Consistent with the principle of proportionality, banks should adopt an ESRM System commensurate to their size, risk profile, and complexity of operations. The guidance states that banks should identify and assess all material risks, including new and emerging risks, on a group-wide and entity specific levels. Banks should use accurate internal and external data and consider the external operating environment in the risk assessment process to inform strategic business decisions and risk management approaches. Banks may employ other approaches that are considered more feasible considering their business model, risk appetite, and operational capacity, provided that these are consistent with the BSP regulations and international standards. Banks are also encouraged to keep abreast with the local and global developments on the sustainability front and strengthen their awareness and capacity in response to the evolving climate and environmental & social risks. 

Related Links

• News on Digital Bank Rules
• Circular 1154 on Digital Bank Rules
• Extended Credit Risk Measure for MSME Loans
• Circular 1155 on MSME Loans
• Regulatory Sandbox Framework
• Guidance on Environmental and Social Risk System

Keywords: Asia Pacific, Philippines, Banking, ESG, Basel, Regtech, Lending, Credit Risk, Regulatory Capital, Climate Change Risk, Regulatory Sandbox, Digital Banking, BSP