Promoting a sound, stable and resilient financial system

Despite the challenges of the COVID-19 crisis, the country’s financial system has remained solid and stable, with more than sufficient liquidity, sufficient capitalization and satisfactory loan and asset quality. Three years of close monitoring, sustained reforms and timely preventive measures by the Bangko Sentral ng Pilipinas (BSP) have brought resilience and robustness to the banking sector and the entire financial system.

Sustainable security and soundness of the banking system

At the heart of this resilience are prudent regulations. During the crisis, the banking sector served as a pillar of strength for the economy, guided by the prospective and risk-based supervision of the BSP. The Philippine banking system (PBS) has maintained its strength, as evidenced by continued growth in assets, deposits, healthy earnings, stable capital and liquidity reserves, and ample loan loss reserves.

Total banking system assets reached 20.7 trillion pesos in April 2022, up 6.7% year-on-year. Similarly, total deposits of 16.13 billion in the same period also reflects buoyant depositor confidence amid the pandemic with 7.2% year-on-year growth.

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Along with improving economic conditions and credit activity, loan quality remained manageable. The PBS gross non-performing loan (NPL) ratio stood at 3.9% at the end of April 2022, a solid rebound from the pandemic high of 4.5% in July 2021.

The latest Total Loan Portfolio (TLP) figures in April 2022 also marked a 7.0% year-on-year expansion with 11.4 billion pesos compared to 10.65 billion pesos recorded in 2021.

The enactment of the Financial Institutions Strategic Transfer Act or FIST has further strengthened the resilience of banks in the face of the crisis. The law allowed banks to sell non-performing assets to asset management companies, called FIST companies, to keep their exposure to bad assets manageable.

Sustained profitability is also evident in the banking sector, with net profit increasing by 26.3% year-on-year to P66.3 billion at the end of March 2022. This growth reflects a reversal from the recorded decline in 5.7% YoY. net income over the same period in 2021.

The BSP also ensured sufficient capitalization which helped the banks to absorb the shocks induced by the pandemic. The capital adequacy ratio stood at 16.2 on an individual basis in March 2022, which is well above the 10% and 8% thresholds of the BSP and the Bank for International Settlements, respectively . This means that banks have sufficient capital for their risk-taking activities at the time of the crisis.

Furthermore, the liquidity coverage ratio of 200.3% on an individual basis at the end of February 2022 indicated a strong liquidity position to meet short-term funding needs.

Maintaining financial services despite the pandemic

The PASB ensured that the banking sector and other financial institutions supervised by the PASB continue to support the country and the financial needs of the Filipinos, especially during these difficult times.

Regulatory relief programs have been launched to help ease the financial burden on households and businesses amid slowing economic activity during the pandemic. These measures included forbearance from loan repayments without incurring additional interest on interest, fees, penalties and other related charges. At the same time, the BSP also imposed a cap on interest or finance charges for credit card receivables to incentivize consumption and promote responsible credit card lending in the country.

The BSP has extended the effectiveness of these prudential and operational relief measures until the end of December 2022 to ensure the continued provision of credit and access to financial products and services for all.

Institutionalized Islamic Bank

The pandemic has not stopped the BSP from advancing the domestic Islamic finance industry. The BSP established the Islamic Banking Supervision Group (IBSG) on June 18, 2021. The IBSG is at the center of the BSP’s strategic initiatives and prudential policy reforms aimed at implementing Islamic banking law and promoting banking Islamic.

Similarly, PASB signed a Memorandum of Understanding (MOU) with the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) as part of PASB’s initiatives to develop Islamic banking and finance in the country.

This pioneering work by BSP continues to strengthen a whole-of-government approach toward greater inclusion and expanded access to the financial system.

Introduced rural banking reforms

A root cause of the weaknesses of many rural banks (RBs) is insufficient capital which limits their ability to cover operational costs and limits the viability of their operations, management and governance. These constraints limit opportunities to expand operations and improve revenue potential. BSP’s Rural Bank Strengthening Program (RBSP) aims to address these concerns.

The RBSP is anchored on the principle that a safe and healthy bank is well capitalized. Its design draws on various reviews and empirical analyzes to develop a program that responds to the challenges faced by BRs. It has four key elements: a stronger capital base for ROs; a holistic menu of five time-limited tracks for RBs; incentives and capacity building interventions; and regulatory improvements to ensure consistency of policy approach and direction.

Enhanced systemic risk management

BSP promoted Financial Stability (FS) and maintained acute vigilance on financial system vulnerabilities, especially during the height of the COVID-19 crisis.

A milestone of BSP’s FS initiatives is the publication of the Macroprudential Policy Strategy Framework. The framework reflects how financial authorities define systemic risk, how they monitor changes in risky behavior and how they progress in addressing this policy concern. As a crucial part of the framework, the BSP conducted the first-ever macroprudential stress test. The completed initial phase assessed the resilience of non-financial corporations (NFCs) to severe but plausible income shocks. The assessment used a holistic approach to the market and the potential side effects of reduced supply and demand resulting from distressed revenues.

Another landmark document is the Systemic Risk Crisis Management (SRCM) framework. The SRCM framework was developed to identify the key actions required to assess, categorize, manage and communicate systemic risks.

All of these positives testified to the strength and resilience of the country’s financial system despite the headwinds caused by the pandemic. More importantly, these instituted outlines of financial reform paved the way for a stronger-than-ever Philippine financial system that was equal to the challenges of the times.

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Don F. Davis