Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. said they have identified 11 universal and commercial banks as domestic systemically important banks (D-SIBs), the first time that a central bank chief disclosed the actual number of D-SIBs they are closely monitoring.
Banks considered D-SIBs are those whose distress or disorderly failure would cause significant disruptions to the wider financial system and economy. However, the BSP will still not publish the list of D-SIBs because doing so could be viewed as an endorsement.
Remolona said scrutinizing the 11 D-SIBs more closely is akin to looking at the whole Philippine banking system.
“We look at the banks that are most likely to affect the rest of the system should they fail. And those are what we call systematically important banks. These banks are subject to a higher standard of regulation and supervision. So, they have to put aside more capital, they have to put aside more liquidity, and they have to be more easily resolved should they fail,” he said in a recent briefing.
The BSP regularly reviews the balance sheet of the 11 D-SIBs. Remolona said the BSP ensures that "if they get into trouble, they wouldn't affect the rest of the financial system in a significant way.”
The BSP chief also noted that the banking system, in general, is fundamentally sound in terms of capital health and liquidity.
As per the latest data, local banks’ capital adequacy ratio, which is a risk-based ratio since it is capital against the risk of assets, stands at 16.4 percent. The international standard is 10.5 percent.
In terms of liquidity, the BSP has measured the industry liquidity coverage ratio at 186.6 percent, also way above the international standard of 100 percent.
A high liquidity ratio is essential for banks to have at all times. “That's the first line of defense should there be a deposit run. So, against the scenario of stress for deposits, banks have to set aside what we call high-quality liquid assets. That's the ratio of high-quality liquid assets to a scenario in which there is a deposit run over 30 days,” said Remolona.
At 186.6 percent liquidity ratio, this level is “pretty good (and) safe.” He added “based on those two numbers, I think our banks are in very good shape, and they are in a position to continue to support economic growth.”
Last year, the BSP instructed D-SIBs to submit updated recovery plans in compliance with its enhanced rehabilitation requirements. This ensures that problematic banks can restore operations as soon as possible.
It was in October 2022 when the BSP released Circular No. 1158, requiring banks to submit a recovery plan by mid-2023.
Basically, a recovery plan is a document that contains the guidelines and measures that a bank will take in response to “stress events and in restoring itself”. It will also include a bank’s risk management framework, business continuity and contingency plans.
The BSP requires all banks to have early warning signals, such as yellow and red lights, to alert the central bank of the need for “early-stage” preventive or corrective actions. In this case, a yellow light signals that a trigger point has been breached, while a red light means activation of the recovery plan. When all is said and done, a green light will indicate that a bank has been fully restored after adopting corrective actions.
With the new rules, the BSP requires all banks to report within 24 hours if triggers in their recovery plans are breached. If they detect risks and vulnerabilities, they must activate recovery measures within three days.
One of the reasons all banks have been required to craft recovery plans, not just D-SIBs, is because the BSP considers the financial system the whole banking sector. All banks should be able to restore themselves to financial soundness in an orderly manner, said the BSP.
As of end-December 2024, the BSP supervises 44 universal and commercial banks. It could be assumed that the top 11 of the 44 big banks are the D-SIBs, namely BDO Unibank Inc., Landbank of the Philippines, Bank of the Philippine Islands, Metropolitan Bank and Trust Co., China Banking Corp., and Rizal Commercial Banking Corp.
Others in the top 11 are Security Bank Corp., Philippine National Bank, Union Bank of the Philippines, Development Bank of the Philippines, and East West Banking Corp.