The local big banks’ management of its foreign exchange (FX) exposures continue to be adequate, based on metrics the Bangko Sentral ng Pilipinas (BSP) uses to measure financial soundness as far as banks’ FX overbought position is concerned.
As monitored by the BSP, the ratio of big banks or universal and commercial banks’ net FX position to regulatory capital is still low, which means it is being managed well, for the first half of 2024. They expect it to remain manageable for the rest of the year despite the local currency depreciation vis-à-vis the US dollar which is strong due to the incoming Trump administration's expected new trade policies from the US.
At the end of June, the ratio has remained low at two percent compared to 1.9 percent same period in 2023. The BSP said this indicates “banks active management of their FX exposures.”
The peso currently stands at the weaker side of P58 versus the US dollar. Market observers expect the local currency will close the year at P59. Based on BSP data, the peso has averaged at P58.58 as of Nov. 18. The highest monthly average for this year so far was P58.69 in June.
Last year, big banks’ overbought FX amounted to $580.8 million. But this was lower in terms of ratio to net open FX position in 2022.
An overbought position is when a bank’s 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. Basically, a bank’s net open FX position is the amount of net assets or liabilities denominated in foreign currency that it holds.
At $580.8 million at the end of 2023, the central bank said this level is manageable with a ratio of 1.3 percent versus the regulatory capital of big banks. At the end of 2023, the peso vis-à-vis the US dollar depreciated to an average P56.06 in the fourth quarter.
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, explained the central bank.
Under BSP Circular No. 1120, issued in June last year, 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.
Meanwhile, the BSP considers the net FX position as manageable as it still shield banks from the adverse impact of a volatile FX market.
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.
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 foreign exchange rate fluctuations.