Banks’ overbought foreign exchange (FX) totaled $784.7 million as of end-June this year which is a level that Bangko Sentral ng Pilipinas (BSP) considers “manageable” based on its monitoring of the ratio of net FX position to a bank’s capital.
The BSP explained that the “low ratio denotes that banks have been actively managing their FX exposures” and for the most part, means banks’ FX position is primarily used to serve clients’ FX requirements.
A bank’s net open FX position is the amount of net assets or liabilities denominated in foreign currency that it holds. Basically, an overbought position is when banks’ FX position leads to an extended upside price movement that is consistent and with no significant retreat. The oversold position is the opposite, or downward price movement.
At $784.7 million, the ratio of the net open FX position vis-à-vis the regulatory capital of the big banks or the universal and commercial banks is at 1.9 percent, which is “marginally higher” compared to 1.8 percent same period in 2022, according to the BSP.
The BSP “closely monitors” the overbought FX position which it said has “remained manageable with the ratio of the net open FX position to the regulatory capital” of the big banks.
Based on BSP Circular No. 1120 which was issued last June 21, 2023, a bank’s consolidated net open FX position -- either overbought or oversold -- should not exceed 25 percent of qualifying capital or $150 million, whichever is lower.
The net FX position to unimpaired capital ratio is a metric that provides valuable insights into how banks are exposed to FX fluctuations and their ability to withstand potential FX-related losses.
Last year, even as the peso hit a record low of P59 versus the US dollar in late September and October, the net FX position to regulatory capital of big banks remained low at two percent in an overbought position.
The two percent ratio is actually higher than end-2021’s 1.2 percent but the BSP said this was still a manageable level which served to shield banks from the “adverse impact in case of volatility in the FX market.”
An open position is either positive or long and overbought means foreign exchange assets exceed foreign exchange liabilities. Or it may be negative, short or oversold meaning foreign exchange liabilities exceed foreign exchange assets.
The BSP has always assured the market that it has the arsenal to prevent speculative peso-US dollar trading and that it also has enough buffer stock to defend the local currency from undue exchange rate fluctuations.
To avoid “extreme” and substantial changes in the exchange rate, the BSP intervenes in the spot market to strengthen the peso by releasing US dollar liquidity. It withdraws from the country’s FX reserves or the gross international reserves to do this.
Exchange rate intervention and raising BSP policy rates are two primary monetary policy measures that BSP can do to stabilize the peso-US dollar rates.
In 2021, the BSP revised the limit to banks’ net open FX positions to increase FX liquidity, as well as curtail speculative activity and to make sure that transactions are legitimate and has the appropriate risk governance.
Banks’ net open FX limit was raised to 25 percent of qualifying capital or $150 million, from the previous limit of 20 percent of unimpaired capital or $50 million, whichever is lower.
The last time the oversold/overbought FX limits of banks was adjusted was in 2007. The BSP adjusted oversold/overbought limits to “ensure that FX risk does not threaten a bank's safety and soundness” and to “reinforce the BSP’s expectation for banks to faithfully adhere to ethical standards in carrying out their FX transactions”.