Banks’ standing as trusted financial institutions will have new yardsticks with the Bangko Sentral ng Pilipinas (BSP) up-coming rule on reputational risk management.

It took time but BSP Deputy Governor Chuchi G. Fonacier said the regulation is about done.

“We’re set to issue (regulation),” she told a Stratbase ADR-hosted forum recently, on reputational risk management as a holistic approach. “We’re coming out with that regulation because banks would need to take a look at it holistically.”

“A bank should be able to protect its standing and that’s where the BSP would like them to be able to respond right away. It would not just be a matter of service delivery but perception … it should all boil down to understanding (and) should have the root cause diagnosis of the situation so it will not just be a superficial way of addressing the issue,” said Fonacier, who heads the BSP’s financial supervision sector.

The BSP’s upcoming guidelines in managing reputational risks, which include systemic, people and other factors, would help banks to have an effective and efficient process of not only controlling or keeping a lid on risks, but also to properly and effectively identify, monitor and assess these risks that could damage their standing as trusted and reliable banks.

Fonacier said banks, especially with digitalization, now accelerated due to the pandemic lockdown that restricted movement and economic activity, would have to have a holistic method of pinpointing the source of their reputational risk which could include the following: corporate governance; personnel and/or management ethics and integrity; organizational culture; business practices; product/service quality; customer relations; financial soundness and viability; handling of environmental and social issues; and legal and regulatory compliance.

The bottomline is that banks should have the capability to control and mitigate hits to their reputation especially those that could escalate and become systemic risks.

“It could also be people risks,” said Fonacier. “But as a whole, the bank should be able to manage their reputational risks and the action should be faster.”

“Banks need to protect their posture as banks. (They) need to prepare for instances when there could be some attacks or developments that would impact their standing as a bank,” said Fonacier. “It should be really (looking) into the root cause of that to be able for the bank to address such a challenge. It’s not just looking at the problem on the surface, but rather digging deeper to the root cause of it. If the root cause has something to do with the delivery of the product or service then it would merit an attention for the bank to focus on addressing system-related, IT-related (issues).”

Fonacier emphasized that the days of solving bank-related problems at piecemeal issues are over. “It should be incumbent upon them (banks) to really understand what’s causing a particular issue. This is where resiliency is really important, not just in communicating to customers, but more so in addressing the root cause of the problem.”

Last Thursday, BSP Governor Benjamin E. Diokno stressed the BSP’s supervisory approach, which he said is “highly influenced by risks arising amid the pandemic.”

This includes how they handle banks’ operational risk with the “rise in online transactions (which) made it necessary for information technology systems to be monitored 24/7 (and) to ensure that systems remain safe and secure, cybersecurity protocols need to be constantly upgraded. Also, work-from-home arrangements spawned operational risk issues as banks made adjustments to ensure continued delivery of services,” said Diokno.

Banks also need to manage credit risk and liquidity risk that are unique to the pandemic. “(Banks) are expected to always look at the quality of their credit portfolio and the adequacy of loan loss provisions,” said Diokno.

“BSFIs (BSP supervised financial institutions) also need to see if credit risk management remains effective amid a pandemic scenario. In this regard, analysis should not be limited to credit exposures.”

“On risks to liquidity, debt relief measures caused changes in expected cash flows. In view of this, BSFIs need to assess the adequacy and quality of their liquidity buffers and capital. This also calls for adjustments in asset and liability,” said Diokno.