The ability of the central bank to dissect “mixed conglomerate structures” which is very challenging for the central bank because of its potential impact on domestic systemically important banks (D-SIBs), will be solved by the recent establishment of a comprehensive group-wide supervision of financial conglomerates, according to Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno.

Diokno said the cross-sectoral Supervisory College under the Financial Sector Forum (FSF), in line with the principles of the Basel Committee on Banking Supervision, focuses on conglomerate risks that will have an impact on D-SIBs or the so-called “too big to fail” financial institutions.

The Supervisory College will start a closer monitoring and probe of financial conglomerates in the second quarter this year and this will include its potential impact on D-SIBs.

“Most D-SIBs are part of conglomerates with mixed conglomerate structures. Since the BSP does not have jurisdiction over all entities within the conglomerate group, there may be existing issues and concerns in non-supervised entities that may have an impact on D-SIBs which may not be accessible to the BSP,” said Diokno, explaining the limits of the BSP in probing mixed conglomerate structures.

“This will be addressed by the Supervisory College since it will serve as forum to facilitate cooperation and coordination between and among the financial sector forum member agencies,” said Diokno.

FSF members who are also in the Supervisory College are BSP, Philippine Deposit Insurance Corp., the Securities and Exchange Commission and Insurance Commission.

Diokno said that since the member agencies include those that supervised non-BSP supervised entities, the Supervisory College members will be able to discuss emerging group-wide risks and vulnerabilities identified in the conglomerate including those from non-BSP supervised entities which may have impact on D-SIBs.

D-SIBs are characterized as banks whose distress or disorderly failure would cause significant disruptions to the wider financial system and economy. The BSP has yet to formally identify the D-SIBs but most credit rating agencies point to the country’s top 20 banks as possible D-SIBs.

The BSP has been monitoring the interrelationship between firms in a conglomerate structure as this set up is usually vulnerable to a possible contagion which happens if a company or entity with financial problems will affect other firms within the conglomerate group.

Based on a BSP paper, a commonly accepted definition of a financial conglomerate is “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”. This definition does not include mixed conglomerates which includes commercial and industrial services, in addition to financial services.

In the Philippines, financial groups with banks as parent companies or known as financial conglomerates include BDO Unibank Inc. of the SM Group and Bank of the Philippine Islands of the Ayala Group. The group also includes the Ty family-controlled Metropolitan Bank & Trust Co., Lucio Tan Group’s Philippine National Bank, the Yuchengco Group’s Rizal Commercial Banking Corp., the Dy-owned Security Bank Corp. and Union Bank of the Philippines of the Aboitiz Group.

Banking groups, meantime, include China Banking Corp., Asia United Bank Corp., and Land Bank of the Philippines. Bank of Commerce of San Miguel Corp., which has a pending universal banking license upgrade, will likely be included in these group listings.

The BSP-led FSF created the Supervisory College after signing a Memorandum of Understanding last month.

The difference between the FSF’s Supervisory College and the existing inter-agency Financial Stability Coordination Council (FSCC) is that the former will have a microprudential approach while the latter already conducts macroprudential surveillance to monitor for systemic risks. The Supervisory College may also elevate to FSCC all financial stability issues.

Diokno said last week that it is “necessary to further strengthen the supervision of financial conglomerates given their interconnectedness and systemic importance.”

The Supervisory College will enhance information-sharing, develop common understanding of risks, further improve risk assessment, foster a shared agenda for addressing identified risks, provide a common platform for communicating key supervisory concerns, and establish a synchronized supervisory plan related to financial conglomerate regulation.