The country’s financial regulators have created an inter-agency, cross-sectoral “Supervisory College” to strengthen the government’s ability to scrutinize financial conglomerates and its impact – in case of collapse – on the entire financial system.

The Financial Sector Forum (FSF), which includes the Securities and Exchange Commission (SEC), Insurance Commission (IC) and banking co-regulator Philippine Deposit Insurance Corp. (PDIC), announced over the weekend that a Memorandum of Understanding (MOU) was forged to establish a Supervisory College for financial conglomerate supervision. The MOU will govern the establishment of a Supervisory College which will serve as the forum to facilitate cooperation and coordination between and among the FSF members.

The Bangko Sentral ng Pilipinas (BSP) checks and supervises financial conglomerates as chair of the Financial Sector Forum (FSF). However, the BSP is limited in terms of enforcement powers to fully protect a bank from the actions of parent companies and affiliates under a “mixed interests” conglomerate structure.

This MOU was upon the recommendation of the International Monetary Fund (IMF). The BSP said that it was in 2020 when the IMF recommended a multilateral agreement among FSF members to create a Supervisory College to better monitor, assess and review the risk level of financial conglomerates.

BSP Governor Benjamin E. Diokno said on Saturday, Jan. 29, that the FSF “recognized the establishment of a Supervisory College as an important regulatory platform in achieving effective and efficient supervision of financial conglomerates and, thus, we agree to support a clear process for coordinating various roles and responsibilities of the FSF with clearly delineated responsibility.”

The MOU virtual signing ceremony was attended by SEC Chairperson Emilio B. Aquino, IC Commissioner Dennis B. Funa, and PDIC Senior Vice President Sandra A. Diaz.

The FSF has adopted the Tripartite Group definition of financial conglomerates since there is no Philippine law or regulation to define financial conglomerates when the BSP first began to monitor these groups. As such financial conglomerates 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.”

The IMF has recommended for FSF to strengthen its 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 has expressed concern that majority of domestic systemically important banks (D-SIBs) are controlled or part of conglomerate structures or “wider groups of non-regulated parent companies and affiliates with non-banking activities” to which BSP has no power of supervision. D-SIBs are banks whose distress or disorderly failure would cause significant disruptions to the wider financial system and economy.

IMF said that BSP needs to strengthen its ability to scrutinize the impact of “mixed conglomerate structures” on D-SIBs. The BSP, however, has told the IMF that regulating groups of conglomerates or conglomerates with “mixed interest” in both financial and non-financial sectors is very challenging.

The BSP has noted these IMF recommendations to cover gaps in the 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.

Diokno remains confident that the country’s D-SIBs or the “too big to fail” banks continue to be strong and well-capitalized as well as liquid with stable funding to support operations amid the COVID-19 pandemic.

BSP’s D-SIBs policy is aligned with the Basel Committee on Banking Supervision which aims to reduce the probability of failure of D-SIBs by increasing their loss absorbency and to reduce the extent or impact of failure of D-SIBs on the domestic or real economy.D-SIBs, which are still unnamed by the BSP, continue to have the ability to handle potential losses.

D-SIBs are required to have additional Common Equity Tier-1 capital or a higher loss absorbency requirement. This is aimed at ensuring that D-SIB risk exposures are supported by high quality capital instruments to increase their resilience, said Diokno.