The inter-agency Financial Stability Coordination Council (FSCC) could do more defensive strategy to support its monitoring of systemic risks and policy interventions to preempt any more COVID-19 shocks in the financial system.
“We see the surveillance or monitoring as a very important core function of the FSCC,” according to its chairperson, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno. But, he said they have every intention of strengthening the FSCC in the near term.
“Of course there are some actions (being taken) and some initiatives that we’d rather tell that to you once they are completed. Maybe that will happen in the very near future,” said Diokno.
One of efforts to buttress the FSCC authority and to institutionalize its legal standing is a proposed Executive Order or EO that has been submitted to Malacanang and is just awaiting President Duterte’s approval and signature. There are no details yet on the proposed EO.
The International Monetary Fund (IMF) has its own recommendations on what else the FSCC can do, such as giving it more teeth and to empower FSCC decisions to have more “influence” such as in a “comply-or-explain mechanism”.
In its latest Financial System Stability Assessment (FSSA) report for the Philippines, part of the IMF-World Bank Financial Sector Assessment Program FSAP mission that it conducts every year, the IMF has noted the effectiveness of the FSCC in its “cross-sectoral coordination of macroprudential policies and crisis management” led by BSP and includes the Department of Finance, the Philippine Deposit Insurance Corp. (PDIC), the Securities and Exchange Commission (SEC) and Insurance Commission (IC).
But the FSCC decisions and its influence “should be enhanced,” said the IMF. “So far, the FSCC has been focusing on risk monitoring. To mitigate potential inaction bias, the FSCC should obtain powers (and a clear Charter or Terms of Reference) to make formal recommendations to its members with a comply-or- explain mechanism. Providing a financial stability objective to the IC, SEC, and PDIC could also strengthen the influence of FSCC’s recommendations,” it added.
While downside risks are on the high side due the pandemic impact, the IMF also suggested for the BSP and FSCC to limit bank dividend distributions “and be ready to take additional measures to strengthen banks’ capital if the risks materialize to continue providing credit to the economy.”
Diokno seemed amenable to recommendations of the FSCC having more sway in managing financial sector stability than just critical monitoring of systemic risks, but he also emphasized that what they do now is a whole-of-market collaboration.
“If we are not effective at this phase of market oversight it will be very difficult to craft suitable and preemptive interventions,” said Diokno, commenting on FSCC’s current role as venue to assess possible systemic risks. “Now this point is important, we must have a preemptive view so that we manage risks before they happen rather than react to them once they happen,” he stressed.
Scrutiny on financial conglomerates
The BSP also leads as chair the Financial Sector Forum (FSF), a body that checks and supervises financial conglomerates. The BSP has adopted the Tripartite Group definition of financial conglomerates since there is no Philippine law or regulation to define financial conglomerates when it first began to monitor these groups which are “any group of companies under common control whose exclusive or predominant activities consist of providing significant services in at least two different financial sectors such as in banking, securities, and insurance.”
In a statement over the weekend, the BSP said the FSF, also an inter-agency group led by the BSP, SEC, PDIC and IC, met on April 27 to review its “significant progress” in financial sector supervision, financial technology or fintech, and consumer protection and financial literacy.
The BSP particularly noted the IMF’s FSSA and that it will incorporate its recommendations for an effective supervision in the financial sector.
“These recommendations cover gaps in legal power of financial sector supervisors related to bank secrecy laws and conglomerate supervision, which were also earlier cited in the joint IMF-World Bank assessment of the BSP’s Observance of the Basel Core Principles for Effective Banking Supervision,” said the BSP on Saturday. “The results of the FSAP assessments will feed into the development of a strategic roadmap for the financial sector,” it added.
The IMF recommendations for FSF is to strengthen sectoral supervision, appoint the BSP as the lead supervisor of financial conglomerates and conduct more frequent and comprehensive risk-assessment of financial conglomerates.
The IMF said the FSF “should consider establishing a platform that would bring together some of the competencies of the FSF and FSCC (for example, a joint committee) as both platforms have responsibilities for addressing the failure of D-SIB (domestic systemically important banks).”
The BSP, for its part, has told the IMF that FSF “had contemplated the idea of designating a lead coordinating regulator for particular groups of conglomerates.” But that the “mixed interest” of conglomerates in both financial and non-financial sectors, make this approach very challenging for the BSP.