this approval, the rbap will take a leadership role in the qualification or screening process of participating banks that wish to offer housing microfinance. this develops a strong sense of product ownership and makes the process more efficient. also this year, we issued circular 683 authorizing rural banks to market, sell and service micro insurance products, subject to certain prudential rules and regulations. this enables rural banks to deliver a full range of financial services needed by your clients, which may include protection against injury, loss of property, and other contingent events. this is a groundbreaking policy that places rural banks on the same footing as universal banks which previously held this business. the bangko sentral has also issued this year circular 685 covering the rules and regulations in recognizing microfinance institutional rating agencies. this is important as the use of objective, credible, and competent third - party ratings of microfinance institutions enhances transparency and possible inflow of resources into the industry. altogether, this should facilitate the further growth and development of microfinance in the philippines which has proven to be an effective medium for liberating millions of filipinos from poverty. ladies and gentlemen of the rbap, all these policies are in place and the opportunities this brings are well within your reach. all you need to do is to continue to strengthen your institutions by aligning governance practices with global standards, strengthening your capital positions, putting in place a proactive risk management system, improving business operations and following industry best practices. i also wish to say that the bangko sentral ng pilipinas remains responsive to issues raised by rbap, including those pertaining to the implementation of certain policies. take for instance circular no. 688 issued only last week – may 26 to be exact – implementing the revised risk based capital adequacy framework for stand - alone thrift, rural and cooperative banks or the so - called basel 1. 5 framework. unlike the full basel 2 framework for universal and commercial banks and their subsidiary banks and quasi - banks, the basel 1. 5 framework involves only a few key changes on the existing framework under circular no. 280 dated march 29, 2001, as amended. the main changes include the increase in risk weight from 0 % to 100 % for foreign currency denominated exposures to the philippine national government and the bangko sentral. the increase in risk weight shall be phased - in over a three year period : that is, 1 / 3 of the applicable risk weight shall be

challenge that our banks must not underestimate. we are maintaining the prescribed minimum car of 10 percent. however, consistent with basel ii recommendations, we have begun implementing major methodological revisions to the calculation of minimum capital that universal banks, commercial banks and their subsidiary banks and quasi - banks should hold against actual credit risk exposures. this significantly amends bsp circular no. 280 dated 29 march 2001 ( for banks ) and bsp circular no. 400 dated 1 september 2003 ( for quasi - banks ). meanwhile, stand - alone thrift banks, rural banks and quasi - banks will continue to be covered for now by existing regulations ( i. e., circular nos. 280 and 400 ) insofar as credit risk measurement is concerned. however, we are studying enhancements to make the applicable capital regulations more attuned to basel ii principles. moreover, the guidelines for allocating minimum capital to cover market risk ( bsp circular no. 360 dated 3 december 2002 ) have also been amended to some extent, primarily to align specific market risk charges on trading book assets with the revised credit risk exposure guidelines. a completely new feature is the introduction of capital charge for operational risk. this reflects recognition of the potentially significant costs emanating from this critical risk area that actually encompasses all facets of bank operations. complementary reform initiatives on other key fronts, we will also carry on with our task of fostering the development of our financial markets through support for various legislative measures, such as the enactment of the credit information system act ( cisa ) that will be pivotal in helping establish a reliable and comprehensive credit information system in the country. we will also continue to foster the creation of stronger and globally competitive financial institutions that can be an asset to the financial system. lately, we have been witnessing a growing trend toward mergers and consolidations among domestic banks and we expect this to further hasten in the next two years. this is driven in part by the increasing market competition as a result of liberalization and the adoption of more stringent global standards. however, we are not discounting the role that smaller specialist banks play in the evolving financial landscape. definitely, we need smaller specialist players that can more effectively cover important niche markets that have their own unique needs. under this scenario, the smaller specialist players are able to complement the services offered by bigger banks. simultaneous with the ongoing process of reform in the banking system, the bsp has also actively engaged in initiatives to promote a deep domestic capital market that