Amendments to Regulations on Deposit for Stock Subscription of Banks/Quasi-Banks

July 25, 2012 BSP CIRCULAR NO. 762-12 SUBJECT : Amendments to Regulations on Deposit for Stock Subscription of Banks/Quasi-Banks The Monetary Board in its Resolution No. 1092 dated 5 July 2012 approved the following guidelines on the treatment of deposit for stock subscription of banks and quasi-banks (QB): SECTION 1. Section X128/4137Q and related subsections of the Manual of Regulations for Banks (MORB)/Manual for Regulations for Non-Bank Financial Institutions (MORNBFI) shall be added to read as follows: "Section X128/4137Q Deposits for stock subscription. Deposits for stock subscription refer to payments made by existing stockholders or new subscribers of the bank/QB on subscription to the increase in the authorized capital, which may be recognized either as a liability or equity. "Deposits for stock subscription shall be recognized as part of equity for prudential reporting purposes when all of the following conditions are met: "a. The deposit for stock subscription meets the definition of an equity instrument under Philippine Accounting Standards 32 Financial Instruments: Presentation such that the deposit for stock subscription shall not be interest-bearing nor withdrawable by the subscriber. ITcCSA "b. The bank/QB's existing authorized capital is already fully subscribed; "c. The bank/QB's stockholders and board of directors have approved the proposed increase in authorized capital; "d. The bank/QB has filed an application for the amendment of its Articles of Incorporation for the increase in authorized capital with the appropriate department of the SES, BSP duly supported by complete documents as listed in Circular Letter No. 2009-042 dated 14 May 2009; "Applications for the amendment of Articles of Incorporation for the increase in authorized capital, which have been returned due to insufficiency of supporting documents, shall not qualify for recognition as an equity instrument; and "e. The bank must have obtained approval of the Monetary Board on transactions involving significant ownership of voting shares of stock by any person, natural or juridical, or by one group of persons as provided in Subsec. X126.2.b, if applicable. "Deposits for stock subscription, which do not meet the abovementioned conditions shall be classified as a liability. "Deposits for stock subscription, which meet the conditions to be recognized as equity shall form part of a bank's qualifying capital for purposes of computing the risk-based capital adequacy ratio under Sections X115 for universal and commercial banks as well as their subsidiary banks and QBs, and X118 for stand-alone thrift banks, rural banks and cooperative banks." SECTION 2. Part II of Appendix 63b/Appendix Q-46 of the MORB/MORNBFI on the qualifying capital under the risk-based capital adequacy framework for the Philippine banking system is hereby amended, as follows: "Part II. Qualifying capital "xxx xxx xxx "A. Tier 1 Capital HIaTDS "xxx xxx xxx "3. Core Tier 1 capital consists of: "a) Paid-up common stock; "b) Deposit for common stock subscription; "c) Paid-up perpetual and non-cumulative preferred stock; "d) Deposit for perpetual and non-cumulative preferred stock subscription; "e) Additional paid-in capital; "f) Retained earnings; "g) Undivided profits (for domestic banks only); "h) Net gains on fair value adjustment of hedging instruments in a cash flow hedge of available for sale equity securities; "i) Cumulative foreign currency translation; and "j) Minority interest in subsidiary financial allied undertakings which are less than wholly-owned: Provided, That a bank shall not use minority interests in the equity accounts of consolidated subsidiaries as avenue for introducing into its capital structure elements that might not otherwise qualify as Tier 1 capital or that would, in effect, result in an excessive reliance on preferred stock within Tier 1: "xxx xxx xxx "B. Tier 2 Capital cETDIA "xxx xxx xxx "8. Upper Tier 2 capital consists of: "a) Paid-up perpetual and cumulative preferred stock; "b) Deposit for perpetual and cumulative preferred stock subscription; "c) Paid-up limited life redeemable preferred stock issued with the condition that redemption thereof shall be allowed only if the shares redeemed are replaced with at least an equivalent amount of newly paid-in shares so that the total paid-in capital stock is maintained at the same level prior to redemption; "d) Deposit for limited life redeemable preferred stock subscription with the replacement requirement upon redemption; "e) Appraisal increment reserve bank premises, as authorized by the Monetary Board; "f) Net unrealized gains on available for sale equity securities purchased subject to a 55% discount; "g) General loan loss provision, limited to a maximum of 1.00% of credit risk-weighted assets, and any amount in excess thereof shall be deducted from the credit risk-weighted assets in computing the denominator of the risk-based capital ratio; "h) With prior BSP approval, unsecured subordinated debt with a minimum original maturity of at least ten (10) years issued subject to the conditions in paragraph 13, in an amount equivalent to its carrying amount discounted by the following rates: and Remaining maturity Discount factor 5 years & above 0% 4 years to <5 years 20% 3 years to <4 years 40% 2 years to <3 years 60% 1 year to <2 years 80% <1 year 100% "i) Hybrid Tier 1 capital as defined in paragraph 4 in excess of the maximum allowable limit of 15% of total Tier 1 capital (net of deductions enumerated in paragraph 3): "xxx xxx xxx "9. Lower Tier 2 capital consists of: "a) Paid-up limited life redeemable preferred stock without the replacement requirement upon redemption in an amount equivalent to its carrying amount discounted by the following rates: Remaining maturity Discount factor 5 years & above 0% 4 years to <5 years 20% 3 years to <4 years 40% 2 years to <3 years 60% 1 year to <2 years 80% <1 year 100% "b) Deposit for limited life redeemable preferred stock subscription without the replacement requirement upon redemption; and HIDCTA "c) With prior BSP approval, unsecured subordinated debt with a minimum original maturity of at least five (5) years, issued subject to the conditions in paragraph 14, in an amount equivalent to its carrying amount discounted by the following rates: Remaining maturity Discount factor 5 years & above 0% 4 years to <5 years 20% 3 years to <4 years 40% 2 years to <3 years 60% 1 year to <2 years 80% <1 year 100% "Less: "i. Limited life redeemable preferred stock treasury shares without the replacement requirement upon redemption; and "xxx xxx xxx" SECTION 3. Part II of Appendix 63c of the MORB on qualifying capital under the risk-based capital adequacy framework for stand-alone thrift banks, rural banks and cooperative banks is hereby amended as follows: "Part II. Qualifying capital "xxx xxx xxx "A. Tier 1 Capital "xxx xxx xxx "3. Core Tier 1 capital consists of: ECHSDc "a) Paid-up common stock; "b) Deposit for common stock subscription; "c) Paid-up perpetual and non-cumulative preferred stock; "d) Deposit for perpetual and non-cumulative preferred stock subscription; "e) Additional paid-in capital; "f) Retained earnings; "g) Undivided profits; "h) Net gains on fair value adjustment of hedging instruments in a cash flow hedge of available for sale equity securities; "i) Cumulative foreign currency translation; and "j) Minority interest in subsidiary financial allied undertakings ( i.e. , RBs and VCCs for TBs, and RBs for Coop Banks) which are less than wholly-owned: Provided, That a bank shall not use minority interests in the equity accounts of consolidated subsidiaries as an avenue for introducing into its capital structure elements that might not otherwise qualify as Tier 1 capital or that would, in effect, result in an excessive reliance on preferred stock within Tier 1: "xxx xxx xxx "B. Tier 2 Capital "xxx xxx xxx "7. Upper Tier 2 capital consists of: "a) Paid-up perpetual and cumulative preferred stock; CIHTac "b) Deposit for perpetual and cumulative preferred stock subscription; "c) Paid-up limited life redeemable preferred stock issued with the condition that redemption thereof shall be allowed only if the shares redeemed are replaced with at least an equivalent amount of newly paid-in shares so that the total paid-in capital stock is maintained at the same level prior to redemption; "d) Deposit for limited life redeemable preferred stock subscription with the replacement requirement upon redemption; "e) Appraisal increment reserve bank premises, as authorized by the Monetary Board; "f) Net unrealized gains on available for sale equity securities purchased subject to a 55% discount; "g) General loan loss provision, limited to a maximum of 1% of total credit risk-weighted assets, and any amount in excess thereof shall be deducted from the total credit risk-weighted assets in computing the denominator of the risk-based capital ratio; "h) With prior BSP approval, unsecured subordinated debt with a minimum original maturity of at least ten (10) years, issued subject to the conditions in paragraph 12, in an amount equivalent to its carrying amount discounted by the following rates: and Remaining maturity Discount factor 5 years & above 0% 4 years to <5 years 20% 3 years to <4 years 40% 2 years to <3 years 60% 1 year to <2 years 80% <1 year 100% "i) Hybrid Tier 1 capital as defined in paragraph 4 in excess of the maximum allowable limit of 15% of total Tier 1 capital (net of deductions enumerated in paragraph 3): "xxx xxx xxx "8. Lower Tier 2 capital consists of: "a) Paid-up limited life redeemable preferred stock without the replacement requirement upon redemption in an amount equivalent to its carrying amount discounted by the following rates: Remaining maturity Discount factor 5 years & above 0% 4 years to <5 years 20% 3 years to <4 years 40% 2 years to <3 years 60% 1 year to <2 years 80% <1 year 100% "b) Deposit for limited life redeemable preferred stock subscription without the replacement requirement upon redemption; and "c) With prior BSP approval, unsecured subordinated debt with a minimum original maturity of at least five (5) years, issued subject to the conditions in paragraph 13, in an amount equivalent to its carrying amount discounted by the following rates: DCHIAS Remaining maturity Discount factor 5 years & above 0% 4 years to <5 years 20% 3 years to <4 years 40% 2 years to <3 years 60% 1 year to <2 years 80% <1 year 100% "Less: "i. Limited life redeemable preferred stock treasury shares without the replacement requirement upon redemption; and "xxx xxx xxx" SECTION 4. Part VI of Appendix 63c of the MORB on definitions under the risk-based capital adequacy framework for stand-alone thrift banks, rural banks and cooperative banks is hereby amended, as follows: "Part VI. Definitions "xxx xxx xxx "8. Deposit for stock subscription This refers to the funds received as deposits for stock subscription that meets the conditions for recognition as equity provided in Sec. X128. "xxx xxx xxx" SECTION 5. Subsec. 4116Q.2 of the MORNBFI on qualifying capital is hereby amended, as follows: "Subsec. 4116Q.2 (2008-4116Q.1) Qualifying capital. The qualifying capital shall be the sum of "a. Tier 1 (core) capital "(1) Paid-up common stock; aTHASC "(2) Deposit for common stock subscription; "(3) Paid-up perpetual and non-cumulative preferred stock; "(4) Deposit for perpetual and non-cumulative preferred stock subscription; "(5) Common stock dividends distributable; "(6) Perpetual and non-cumulative preferred stocks dividends distributable; "(7) Surplus; "(8) Surplus reserves; "(9) Undivided profits; and "(10) Minority interest in the equity of subsidiary financial allied undertakings which are less than wholly-owned: Provided, That a QB shall not use minority interests in the equity accounts of consolidated subsidiaries as avenue for introducing into its capital structure elements that might not otherwise qualify as Tier 1 capital or that would, in effect, result in an excessive reliance on preferred stock within Tier 1: "xxx xxx xxx "b. Tier 2 (supplementary) capital which shall be the sum of "(1) Upper Tier 2 (UT2) capital "(a) Paid-up perpetual and cumulative preferred stock; TSIDEa "(b) Deposit for perpetual and cumulative preferred stock subscription; "(c) Perpetual and cumulative preferred stock dividends distributable; "(d) Appraisal increment reserve QB premises, as authorized by the Monetary Board; "(e) Net unrealized gains on underwritten listed equity securities purchased: Provided, That the amount thereof that may be included in UT2 capital shall be subject to a fifty-five percent (55%) discount (for IH); "(f) General loan loss provision: Provided, That the amount thereof that may be included in UT2 capital shall be limited to a maximum of one and twenty-five hundredths percent (1.25%) of gross risk-weighted assets, and any amount in excess thereof shall be deducted from the total risk-weighted assets in computing the denominator of the risk-based capital ratio; and "(g) With prior BSP approval, unsecured subordinated debt (UnSD) with a minimum original maturity of at least ten (10) years, subject to the following conditions: "xxx xxx xxx " Provided, That it shall be subject to a cumulative discount factor of twenty percent (20%) per year during the last five (5) years to maturity [ i.e. , twenty percent (20%) if the remaining life is four (4) years to less than five (5) years, forty percent (40%) if the remaining life is three (3) years to less than four (4) years, etc.]: Provided, further, That where it is denominated in a foreign currency, it shall be revalued periodically (at least monthly) in Philippine peso at prevailing exchange rate using the same exchange rate used for revaluation of foreign currency denominated assets, liabilities and forward contracts under existing regulations: Provided, furthermore, That, for purposes of reserve requirement regulation, it shall not be treated as a deposit substitute liability or other forms of borrowings. IaEHSD " Provided, That the following items shall be deducted from the total of UT2 capital: "xxx xxx xxx "(2) Lower Tier 2 (LT2) capital "xxx xxx xxx "(b) Deposit for limited life redeemable preferred stock subscription; "(c) Limited life redeemable preferred stock dividends distributable; and "(d) With prior BSP approval, UnSD with a minimum original maturity of at least five (5) years, subject to the following conditions; "xxx xxx xxx " Provided, That it shall be subject to a cumulative discount factor of twenty percent (20%) per year during the last five (5) years to maturity [ i.e. , twenty percent (20%) if the remaining life is four (4) years to less than five (5) years, forty percent (40%) if the remaining life is three (3) years to less than four (4) years, etc.]: Provided, further, That where it is denominated in a foreign currency, it shall be revalued periodically (at least monthly) in Philippine peso using the same exchange rate used for revaluation of foreign currency denominated assets, liabilities and forward contracts under existing regulations: Provided, finally, That, for purposes of reserve requirement regulation, it shall not be treated as equivalent to a deposit substitute liability or other forms of borrowings. " Provided, That the following items shall be deducted from the total of Lower Tier 2 capital: cACEaI "xxx xxx xxx" SECTION 6. The Financial Reporting Package (FRP), issued under Circular No. 512 dated 3 February 2006, as amended, is further amended to (a) revise the Manual of Accounts on the definition of "Deposit for stock subscription" account under "Other Liabilities" and the creation of "Deposit for stock subscription" account under "Equity Accounts", and (b) revise the reporting templates of the Balance Sheet of the FRP/Simplified FRP, as follows: (a) Manual of Accounts "BALANCE SHEET ACCOUNTS "xxx xxx xxx " Liability Accounts "xxx xxx xxx "30. Other Liabilities "xxx xxx xxx "(h) Deposit for stock subscription This refers to funds received as deposits for stock subscription but do not meet the conditions for recognition as equity provided in Sec. X128 of the Manual of Regulations for Banks (MORB). "xxx xxx xxx " Equity Accounts "xxx xxx xxx "4. Deposit for stock subscription This refers to funds received as deposits for stock subscription that meet the conditions for recognition as equity provided in Sec. X128 of the MORB. "5. Retained Earnings "(a) Retained Earnings Reserve EHCDSI "xxx xxx xxx "(b) Retained Earnings Free This refers to the unappropriated or free portion of the accumulated profits of the bank. "xxx xxx xxx "6. Stock Dividends Distributable This refers to the amount of stock dividends declared by the Board of Directors, the corresponding certificates for which have not yet been issued. "7. Undivided Profits This refers to the clearing account for all income and expenses, the balance of which shall be transferred to "Retained Earnings Free" account at the end of the accounting period after taking up all other charges and/or credits that may be appropriately cleared thru this account. "8. Other Comprehensive Income "(a) Net Unrealized Gains/(Losses) on AFS Financial Assets "xxx xxx xxx "(b) Gains/(Losses) on Fair Value Adjustments of Hedging Instruments "xxx xxx xxx "(c) Cumulative Foreign Currency Translation This refers to: "xxx xxx xxx "9. Appraisal Increment Reserve This is the reciprocal account of "Bank Premises Appraisal Increment" account. "10. Treasury Stock This refers to the stocks that have been issued as fully paid and have been reacquired by the bank and not retired. This also refers to shares of the parent bank held by a subsidiary in a consolidated balance sheet. aCcSDT "11. Minority Interest in Subsidiaries This refers to the portion of net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent in line by line consolidation of financial statements. "12. Assigned Capital This refers to the capital permanently assigned by a foreign bank to its branches operating in the Philippines pursuant to Section 4 of R.A. No. 7721. "xxx xxx xxx" (b) Report Schedule Attached as Annexes 1 and 2 are the revised reporting templates of the Balance Sheet of the FRP and Simplified FRP, respectively. SECTION 7. The guidelines governing the mode and submission of the reportorial templates of (1) Financial Reporting Package (FRP) under Circular No. 512 dated 3 February 2006, as amended, and the Simplified FRP under Circular No. 644 dated 10 February 2009, as amended, as well as (2) Risk-based Capital Adequacy Frameworks under Circular No. 574 dated 10 July 2007, as amended (for universal and commercial banks and their subsidiary banks and quasi-banks) and Memorandum No. M-2010-014 dated 15 June 2010 (for stand-alone thrift, rural and cooperative banks) shall be covered by a separate issuance. This Circular shall take effect fifteen (15) calendar days following its publication either in the Official Gazette or in a newspaper of general circulation. FOR THE MONETARY BOARD: (SGD.) AMANDO M. TETANGCO, JR. Governor Office of the Governor ANNEX 1 Financial Reporting Package (Cir. 512, as amended) ANNEX 2 Simplified Financial Reporting Package