To ensure financial stability and prevent contagion, the Financial Sector Forum (FSF), composed of four financial regulators led by the Bangko Sentral ng Pilipinas (BSP), has identified 12 financial conglomerates engaged in banking activities in the country that will be scrutinized and monitored within a course of five years.

So far, FSF has conducted three Supervisory College reviews to holistically assess the impact of emerging risks both financial and non-financial in financial conglomerates. Basically, a Supervisory College review is a comprehensive analysis of scenarios that may affect financial conglomerates taking into account their interconnectedness to the economy as a whole. This is where the concept of “too big to fail” is considered.

The BSP, with the Securities and Exchange Commission (SEC), the Insurance Commission (IC), and the Philippine Deposit Insurance Corporation (PDIC), already reviewed three of the 12 financial conglomerates since last year.

The remaining nine financial conglomerates will be covered between now until 2027 or 2028. The first Supervisory College was conducted in June 2022.

The BSP in a report said the Supervisory College will be conducted for one financial conglomerate per semester.

“To date, three Supervisory Colleges have already been completed. A pilot run was conducted from April to August 2022, while the results of the second College were reported in the February 2023 FSF meeting,” said the central bank.

The third Supervisory College was started last June this year and results of that review is expected to be reported to FSF by the first quarter of 2024, said the BSP.

“Over the next five years, the College aims to cover the remaining nine financial conglomerates,” it added in the report.

The FSF was formed to create a structured framework to coordinate the supervision and regulation of the financial system.

In 2022, the FSF agreed to adopt a framework for establishing a Supervisory College which is an “important regulatory platform to facilitate collaboration and coordination between and among the FSF member agencies, specifically for supervising financial conglomerates in the Philippines.”

The FSF members signed a memorandum of understanding in January 2022 for the creation of the Supervisory College.

The BSP describes a financial conglomerate as a “group of entities under common control or influence that engage in significant financial activities in at least two regulated banking, securities, or insurance sectors.”

“Financial conglomerates remain dominant forces in our financial system, accumulating significant assets, offering diverse products and services, and becoming prominent participants in the financial services market. While their broad service delivery approach has advantages, operating conglomerates also entail risks to the financial system, necessitating effective, efficient, and coordinated oversight across the FSF member agencies,” said the BSP.

A BSP report explained that a Supervisory College is established for each identified financial conglomerate. It further noted that “each Supervisory College, composed of members designated by each agency who directly supervises the entities under each financial conglomerate, is tasked to carry out the objectives of the MOU, including the risk assessment of each financial conglomerate.”

Under each review, regulators assess the overall governance of the financial conglomerate, including the ultimate parent company, as well as the impact of contagion, leverage, concentration, liquidity, and other significant risks on the safety and soundness of the financial conglomerate, said the BSP.

“They are expected to design a supervisory plan to address emerging systemic or significant risks and conduct continuing surveillance of the financial conglomerate, it added.

Since the Supervisory College was established for a more effective and efficient supervision of financial conglomerates, the FSF makes use of it to facilitate cooperation and coordination between and among the supervisory agencies. It aims to enhance information sharing and provides a platform for communicating key supervisory issues and concerns involving financial conglomerates.

The difference between the FSF’s Supervisory College and the existing inter-agency Financial Stability Coordination Council or FSCC is that the former will have a microprudential approach while the latter already conducts macroprudential surveillance to monitor for systemic risks.

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.

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.

Financial groups also include 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, are China Banking Corp., Asia United Bank Corp., and the government-owned Land Bank of the Philippines.