The International Monetary Fund (IMF) is urging the Bangko Sentral ng Pilipinas (BSP) to strengthen its bank resolution and crisis management policy beginning with the “too big to fail” banks for early intervention and timely remedial action, making it easier to release emergency liquidity assistance (ELA).
In its latest “Financial System Stability Assessment” (FSSA), IMF strongly recommended that banking co-regulator, the Philippine Deposit Insurance Corp. (PDIC), should be granted “comprehensive” powers as the banking sector’s “resolution authority.”
It did not however mention proposals to transfer PDIC, currently an agency under the Department of Finance, to the BSP as per a recently filed senate bill.
“While banking institutions are subject to a blend of BSP and PDIC resolution powers, PDIC appears to serve as the de-facto principal resolution authority,” said the IMF, adding that it will be a “logical next step” to amend existing laws to make it official.
For Philippine banks, the FSSA report listed several recommendations for short-term solutions as well as for the medium-term, to address immediate risks and vulnerabilities from the COVID-19 pandemic.
The short-term recommendations for both BSP and PDIC handling are: the timely corrective actions and resolution of weak banks; and implementation of resolvability assessments and resolution plans, starting with domestic systemically important banks or D-SIBs.For the BSP specifically, it is urged to improve legal conditions for ELA and avoid assistance without collateral.
“The legal framework for ELA should specify the conditions under which it can be provided more. Best practices suggest that a central bank should provide ELA only if a bank satisfies preconditions, such as exhausting all market-based and shareholder-sourced liquidity support and having adequate capital and sufficient collateral. The BSP should not provide uncollateralized loans,” said the IMF.
For ELA to be effective, it said the BSP should take a “broader range of collateral (and that it) needs to establish internal guidance on determining bank's capital position and general viability for ELA purposes.”
The BSP, for now, consider ELA legal framework as sufficient including the range of acceptable ELA collaterals. The amended BSP charter allow it with the flexibility to accept other kinds of collaterals.
“Nonetheless, issuance of more specific guidelines on the conditions/collaterals for the grant of ELA may be considered,” said the IMF.
The IMF said BSP has done a lot in its problematic bank resolution framework which includes the prompt corrective action (PCA) framework, but the IMF said options are limited to liquidation. It also noted that the BSP’s purchase and assumption (P&A) tool – which is used to res-cue a failing bank – still includes in the rescue package uninsured creditors and bad assets.
“The law should provide for bridge banks and possibly for statutory bail-in tools along with increasing loss absorbing capacity requirements and strengthen the P&A tool to address potential D-SIB failures,” said the IMF.
It added that the early intervention and remedial action framework “could be further streamlined and include a clearer escalation process to avoid that severely deficient banks continue operating for long, as currently observed occasionally.”
The IMF said existing rules also leave weak banks operating for too long. It said the PDIC should stop its bail out of a weak bank’s shareholders by providing open bank assistance and to also consider what it called a dedicated backstop for the Deposit Insurance Fund from the government or Bureau of the Treasury for quick fund access.
The IMF also recommended that BSP and PDIC place more attention to its coordination with banks and to immediately start working on the “resolvability assessments and resolution plans” for individual banks beginning with D-SIBs.
It said both BSP and PDIC should consider establishing a platform or a joint committee to address a D-SIB failure and by improving the functions of the BSP’s Financial Sector Forum and inter-agency Financial Stability Coordination Council.
The IMF said issues on financial safety net, crisis management and resolving bank problems have shown some progress in the last 10 years but still, it said resolution powers provided by BSP and PDIC are “relatively complex”. The PCA framework, in the meantime, could be improved upon by a “more specific escalation procedures” not just liquidation, it said.
The IMF, after consultations with the BSP and PDIC, said both have already strengthened its working collaboration. The BSP for its part has streamlined its early intervention measures and PCA, and also put up the banks for resolution (BRes) framework. More changes to BSP regulation were approved last year to have a quicker resolution process.
“They acknowledge the need to conduct resolvability assessments and to formulate resolution plans for individual banks to ensure timely and orderly resolution in case of bank failure,” said the IMF.
As for the recommendation to designate the PDIC as a resolution authority, the BSP said resolution authority lies both in the BSP and PDIC, as per their respective charters.
As IMF noted, “the laws are also clear on where the power and responsibilities of the BSP on banks end and at what point the power of the PDIC begins with respect to resolution. The resolution power ultimately resides with the BSP with respect to operating financial institutions under its jurisdiction while the PDIC’s resolution authority comes into play when the BSP cannot act due to conflict of interest or because it is beyond the BSP’s mandate.” After a bank is closed by the BSP, the PDIC takes over as receiver and liquidator.
“We believe that the present set-up where the BSP exercises both supervisory and resolution authorities, promotes efficiency and evenhanded action as the BSP has the necessary information to support the resolution of a bank. Moreover, the PDIC is onboarded early on in the resolution process through the conduct of joint BSP-PDIC examinations, regular meetings to discuss banks under PCA or BRes frameworks and information sharing arrangement. This effectively addresses the perceived conflict of interest,” said the IMF.
The IMF said for now, the BSP and PDIC “believe that the current resolution structure is working well in the Philippine context.”
“With respect to the recommendation to ensure timely corrective action and resolution of weak banks, the BSP is already in the process of revising and streamlining its early intervention and remedial framework,” said the IMF. At this point, the IMF said banks currently under the PCA framework “do not pose systemic risk to the Philippine financial system.”