Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said the recovery of post-pandemic financial markets will have to depend on socio-economic interlinkages and on how the different economies behave with one another to manage emerging systemic risks.

Diokno, who is the co-chair of the Regional Consultative Group for Asia of the Financial Stability Board (RCGA-FSB), said in a recent FSB-organized Emerging Market and Developing Economies forum that a holistic view is necessary since heightened financial integration during and post-COVID-19 crisis will “continuously test financial stability” due to onshore and across borders’ systemic risks.

“This was the lesson we learned from the 2007 Global Financial Crisis (GFC) and it is as much a lesson today, even though the GFC and COVID-19 are very different shocks,” said Diokno in the forum attended by 60 other high ranking officials from 25 jurisdictions. The forum was held at the premises of the Bank for International Settlements in Basel, Switzerland.

Diokno talked about the so-called “fallacy of composition” where “stakeholders naturally maximize opportunities for themselves while the authorities consider what is in the best interest of the system.” He said the fallacy suggests that these two initiatives may not be aligned at times.

He also said that while central banks must ensure there is sufficient market liquidity, how this liquidity is distributed within the economy is “arguably as much, if not more, important than the aggregate amount” since understanding this will help monetary officials when to time normalization, post-pandemic.

The BSP, for its part, has been long preparing a systemic risk framework and conducting other systemic risk stress tests under the Financial Stability Coordination Council.

Diokno in the forum said interlinkages within an economy and across jurisdictions “quickly breed systemic risks.” He also noted that the oversight of financial markets should “extend beyond individual institutions and focus instead on how the different stakeholders behave with one another.”

The BSP’s latest Financial Stability Report (FSR) still note that COVID-19 has raised systemic risk issues which the BSP and other local financial regulators need to address. But, Diokno said the underlying changes and the nature of the pandemic makes it difficult to forecast financial stability, but that definitely, systemic risk “has risen”.

The FSR points to three industries that are especially at risk, such as education, retail trade and the commercial real estate sector. Debt servicing and debt prepayment remain primary concerns, given that the pandemic has eroded incomes and business opportunities.

Under Diokno’s term as co-chair, the 17-member RCGA have increased pre-emptive talks on how to address the diverging levels of COVID-related recoveries between advanced or rich economies such as the US and emerging markets.

The Switzerland-based FSB is a global venue for financial system reforms to achieve and sustain global financial stability. The RCGA, in the meantime, is one of six regional committees created by the FSB.

The RCGA’s 17 jurisdictions are the Philippines, Australia, Brunei Darussalam, Cambodia, China, Hong Kong SAR, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Pakistan, Singapore, Sri Lanka, Thailand, and Vietnam.