Recent monetary actions to moderate real estate risks

MANILA, Philippines - Recent monetary policy actions should moderate the risks faced by banks when lending to and investing in the real estate sector, the Bangko Sentral ng Pilipinas said.

“I think the new measures — the credit risk management framework, the REST (real estate stress test), the expanded definition of RE (real estate) exposures, the measured increases in policy and SDA (Special Deposit Account) rates and RR (banks’ reserve requirements) — have provided the market with clear enough guidance to help them better appreciate the risks of their lending activities,” BSP Governor Amando M. Tetangco Jr. said in an e-mail over the weekend.

“(These are also meant) to make sure that banks have the appropriate capital to support these activities and that banks have assessed the credit worthiness of their clients. These should help cool any brewing pressures,” he said.

Tetangco made the comment after analysts last week raised concerns that land prices in Metro Manila’s business districts have been escalating to their highest levels since the 1997 Asian financial crisis, putting the country at risk of an asset bubble in the property market.

Banks’ exposure to the property sector grew 22 percent to P1.097 trillion in June from the same period a year ago, latest BSP data showed. This was driven by a 21-percent rise in real estate loans to P924.317 billion and a 26-percent increase in investments in housing securities to P172.907 billion.

But in the last week of October, Tetangco has already told reporters there remains no property bubble in the economy even if there are certain segments in the real estate sector with fast-rising valuations.

The BSP has continuously adopted measures to ensure there are no housing bubbles in the market, in line with its objective of keeping the financial system stable.

In July, the central bank required banks to undergo a separate stress test in order to assess the impact of their exposure to the property sector once borrowers fail to pay back their loans.

Banks should be able to maintain a common equity tier 1 capital ratio of at least six percent and a minimum risk-based capital adequacy ratio of 10 percent even if 25 percent of a lender’s exposure to the property sector has been written off.

There would be a quarterly report submitted to the BSP and those found non-compliant will be given the chance to explain and submit an action plan for their shortcomings.

At the same time, the central bank in 2012 tightened regulations in monitoring banks’ exposure to the property sector. 

The BSP expanded the reporting guidelines which now covers loans to developers of socialized and low-cost housing, and to individuals, and credit supported by non-risk collaterals of Home Guarantee Corp. guarantee.

Moreover, banks are also required to report their investments in real estate securities.

These policy adjustments targeted specifically to address banks’ exposure to the real estate exposure come hand in hand with macroprudential regulations the BSP has also implemented to mitigate risks in the financial system.