The Bangko Sentral ng Pilipinas (BSP) said big banks’ net open foreign currency or FX position is overbought but manageable and could shield the industry from FX-related shocks. 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. In a 2022 report on the Philippine Financial System (PFS) that BSP released on Saturday, May 6, it said that the banking sector’s net open FX position continued to be manageable based on its monitoring of the ratio of net FX position to a bank’s capital. The report noted that last year, when the peso rapidly lost against the strong US dollar and hit a record low of P59 in late September and October, the net FX position to regulatory capital of domestic big banks remained low at two percent in an overbought position. “Although the ratio went up from 1.2 percent in 2021, the ratio continued to be manageable, shielding the industry from adverse impact in case of volatility in the FX market,” said the BSP. It added that “the low ratio may also denote that banks’ FX position is primarily used to serve clients’ FX requirements.” An open position is either positive or long and overbought which means foreign exchange assets exceed foreign exchange liabilities. Or it may be negative, short or oversold meaning foreign exchange liabilities exceed foreign exchange assets. In October last year, when the peso was its weakest versus the US dollar, BSP Governor Felipe M. Medalla assured the market that BSP 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 Medalla also reassured banks and market traders that BSP continues to apply potent measures in detecting speculative activities in the FX spot market. 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. In defense of the peso, the BSP sold almost $15 billion. Medalla has said that exchange rate intervention and raising BSP policy rates are two primary monetary policy measures that they are undertaking to stabilize the peso-US dollar rates. Since May 19, 2022, the BSP has increased the key borrowing rate by 425 basis points to 6.25 percent. Since the BSP uses a flexible and free-floating exchange rate policy, it remains market-determined. It stands ready to participate in the FX market only to ensure orderly market conditions and to reduce excessive short term volatility in the exchange rate. In 2021, the BSP has 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”. The BSP has been closely monitoring banks’ compliance with the overbought and oversold limit and has “a more intense” surveillance tool to monitor authorized agent banks (AABs) that will breach the limit five times within a 20-business day period. Instances of breaches that will be evaluated will be based on frequency and the gravity of the breaches, and the underlying cause or causes of the breaches and the extent to which these are consistent with the AAB’s declared business strategies, said the BSP. To be evaluated are also the strength of the AAB’s risk management system and actions taken by the AAB, if any, to address the breaches and restore compliance with the limit. Based on the second semester 2022 PFS, despite the uncertain and challenging global economic environment, the BSP reported that the Philippine banking system as the core of the financial system remained “sound and stable with continued growth in its assets, loans, deposits, and profit, as well as ample capital and liquidity buffers and provision for credit losses.” “As the economy continues to recover, we expect the overall key performance indicators of banks to further improve and move closer to pre-pandemic levels. This will place banks in a stronger position to support domestic recovery,” Medalla said over the weekend.