The Bangko Sentral ng Pilipinas (BSP) is planning to set up an updated resolution framework for problematic banks next year before adopting a “positive and neutral” countercyclical capital buffer (CCyB) to ensure banks have adequate capital at all times.
This was what BSP told the International Monetary Fund (IMF) during the last Article IV Consultation conducted in the last quarter of 2024.
In the recently released IMF staff report, they acknowledged the progress made for a neutral CCyB that the BSP adopted in December 2018. The CCyB is not yet activated.
The BSP intends to have a decision framework as a first step before moving to a neutral CCyB while confident at the moment that the banking system have high capital buffers that are adequate.
Basically, the CCyB is a precaution to make sure that banks have enough capital to ensure flow of credit in times of financial stress. It is set at zero percent and subject to upward adjustment to a rate that will be determined by the Monetary Board when systemic conditions warrant but not to exceed to 2.5 percent. In the event that an increase to the CCyB is approved, it will be set after one year from its announcement while a decrease will take effect immediately.
The BSP, according to the IMF report, is planning to submit legislative proposals by the middle of 2025 for the development of an effective resolution framework while the BSP facilitates the establishment of a resolution unit.
In determining CCyB, one of the critical points for the BSP is data from conglomerates, especially financial conglomerates. “They (BSP) recognize the difficulties in obtaining data on conglomerates for supervision and are actively addressing this challenge,” said the IMF.
The IMF recommended that the BSP prepare itself by adjusting macroprudential policy in line with developments in the financial cycle to preempt the build-up of vulnerabilities.
“As monetary policy eases, and the pick-up in investment materializes, credit demand may increase, requiring vigilance,” said the IMF.
It said the BSP “could separately move toward a positive neutral level for the countercyclical capital buffer and further develop a CCyB decision framework in parallel.” It added that a gradual phase-in of higher capital requirements during the expansion phase of the financial cycle “could mitigate excessive credit growth and strengthen banks’ capacity to absorb losses in the event of financial stress.”
“Replacing the cap on commercial real estate exposures with a sectoral systemic risk buffer would provide banks with price-based incentives to align their loan portfolios and capital buffers with systemic risk,” said the IMF, which continue to highlight the vulnerabilities of the property sector.
Meanwhile, as the BSP is updating the bank resolution framework and developing a resolution manual, these efforts also seek to improve its emergency liquidity assistance (ELA) and lender of last resort (LOLR) frameworks.
“Financial supervision could be further strengthened by formalizing and expanding supervisory colleges for conglomerate supervision, addressing data gaps within and between conglomerates, understanding financial linkages, including through non-bank financial institutions, and developing capacity for regular stress tests,” said the IMF.
From the BSP side, it has informed the IMF that vulnerabilities in the real estate market is “limited” due to the effectiveness of its prudential measures as far as managing real estate exposures are concerned.
The BSP said that even vacancies left by the exiting Philippine Offshore Gaming Operators (POGOs) is not much of a concern since “developers possess the flexibility to adjust project completion timelines” and traditional residents will replace POGOs.
In the meantime, the BSP remains confident that banks continue to have sufficient capital buffers to “withstand a material downturn in the property sector, as confirmed by the BSP’s real estate stress tests.”
After the CCyB, the BSP will introduce two other systemic-related measures for managing credit growth, such as debt-to-earnings-of-borrowers’ test (DEBT) and the borrowers’ interconnectedness index (BII).
The IMF since 2021 has been urging the BSP to strengthen its bank resolution and crisis management policy beginning with the “too big to fail” banks for early intervention and timely remedial action such as making it easier to release ELA.
The IMF said BSP has done a lot in its problematic bank resolution framework which includes the prompt corrective action (PCA) framework, but the IMF has said in the past that options were limited to liquidation.