Digital banks seen to meet BSP standards

DIGITAL BANKS are likely to meet the reserve requirement ratio (RRR) of 8% and are expected to comply with the existing prudential requirements for big banks, the Bangko Sentral ng Pilipinas (BSP) said.

BSP Deputy Governor Chuchi G. Fonacier said in a Viber message that they considered digital banks’ scope of authority, capital requirement, and ability to rapidly expand operations in setting up the 8% RRR.

“The 8% reserve requirement rate (RRR) for digital banks was the result of discussions during the BSP’s consultation process taking into account RRR across banking categories,” Ms. Fonacier said.

“Moreover, the final RRR of digital banks is consistent with the BSP’s long-term goal of implementing graduated, single-digit RRRs across all banking institutions towards more market-oriented instruments for liquidity management,” she added.

BSP Circular No. 1154 set digital banks’ reserve ratio, or the percentage of deposits and deposit substitutes they must keep with the BSP, at 8%. The RRR for big banks is currently at 12%, one of the highest in the region. Reserve requirements for thrift and rural lenders are at 3% and 2%, respectively.

“Nonetheless, the BSP can adjust the RRRs of banks, including digital banks, as may be warranted, consistent with its price and financial stability objectives,” Ms. Fonacier said.

Under the same circular, digital banks must also meet the same Basel III capital, liquidity and leverage requirements covering universal and commercial banks.

The Basel III framework contains measures that aim to improve banks’ risk management so they can withstand excessive financial stress. These came in the aftermath of the 2008 Global Financial Crisis. 

“The guidelines provide, among others, that a digital bank shall be considered a ‘complex bank’ for purposes of compliance with corporate and risk governance standards in view of its wide reach and ability to rapidly expand operations,” Ms. Fonacier said.

“This policy approach ensures that digital banks operate in a safe and sound manner as they offer and promote access to innovative financial services,” she added.

In a conference hosted by The Asian Banker on Thursday, BSP Assistant Governor Lyn I. Javier said digital banks are more exposed to risks such as cybersecurity threats as well as issues about money laundering and consumer protection.

“We issued prudential regulation for digital banks just to level the playing field, recognizing digital banks as complex banks,” Ms. Javier said.

“Now, we have also issued the open finance framework and the institutionalized regulatory sandbox. I think that already provides an enabling environment for these players to continue to provide financial services and create partnerships within the industry,” she added.

Earlier this month, the BSP approved the regulatory sandbox rules formalizing the “test and learn” (T&L) approach for startups. Meanwhile, the Open Finance Framework, which was published in 2021, lays out the rules for enabling open finance in the country.

According to Ms. Fonacier, digital banks undertake a chartering process on the suitability of shareholders, adequacy of financial strength, technical expertise, and integrity of their board and senior management. They also conduct a detailed review and assessment of support information technology (IT) systems and infrastructure.

“Thus, these banks, once in operation, can meet the BSP’s prudential standards and perform in a safe and sound manner,” she said.

Ms. Fonacier said BSP Circular No. 1154 forms part of the BSP’s Digital Payments Transformation Roadmap aimed at advancing the central bank’s financial inclusion agenda while driving the adoption of digital services in the country.

When asked about the BSP’s initial observations on the operation of digital banks in the country, Ms. Fonacier said the positive response of the public is “very encouraging” based on the number of deposits recorded by these lenders.

“More than the attractive rates and ease in onboarding, the trust gained from the public knowing that these digital banks are regulated by the BSP is certainly a big factor,” Ms. Fonacier said.

“On the side of our digital banks, they have leaned towards a calculated strategy in the initial months of operations. Amid the clear public interest, most have opted to first offer their products to targeted customers just to ensure that any possible issues are readily resolved prior to fully launching to the public,” she added.

The central bank capped the number of digital banking licenses to six last year to monitor the development of the sector, ensure competition, and boost its capacity to regulate these kinds of lenders.

The six online lenders that secured licenses to operate in the country are Tonik Digital Bank, Inc.; GOtyme of the Gokongwei group and Singapore-based Tyme; Maya Bank of Voyager Innovations, Inc.; Overseas Filipino Bank, a subsidiary of Land Bank of the Philippines; UNObank of DigibankASIA Pte. Ltd.; and UnionDigital of UnionBank of the Philippines, Inc. — Keisha B. Ta-asan