BSP sets more risk-management tools

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By Melissa Luz T. Lopez
Senior Reporter

THE CENTRAL BANK is lining up more risk-management tools to fortify the liquidity and credit profiles of big banks, ahead of next year’s target to comply with global standards.

Bangko Sentral ng Pilipinas (BSP) Deputy Governor Chuchi G. Fonacier said monetary authorities are looking at tighter regulations covering universal and commercial banks under the Basel 3 framework, including rules on derivative products as well as risk-based pricing for retail lending.

“The enhancement of the banking system’s compliance with the Basel Accord through the implementation of other Basel III reform standards governing interest rates in the banking book, risk-based pricing for consumer loans, reforms in banks’ over-the-counter (OTC) derivatives transactions shall similarly be pursued to make the domestic banking system more dynamic in responding to the demands and challenges of a rapidly evolving global financial services industry,” Ms. Fonacier said in a recent e-mail interview.

These standards are aligned with the international Basel 3 framework which prescribes supervisory tools to improve risk management in a bid to prevent a repeat of the 2008 Global Financial Crisis. Excessive lending led to massive credit defaults that led to the collapse of a number of big banks and triggered recession worldwide.

Currently, regulators assign a standard 75% risk weight to banks’ retail exposures. The Bank of International Settlements has cited the need to strengthen this rule by factoring in specific risks from a loan.

On OTC instruments, BSP Governor Nestor A. Espenilla, Jr. previously said that the proposed rules will temper shocks from currency fluctuations which affect derivative transactions.

Ms. Fonacier added that the central bank is also looking at stricter standards on cash flow management for lenders by requiring the submission of intraday liquidity risk reports.

The net stable funding ratio (NSFR) is likewise expected to undergo a pilot run this year towards full adoption by 2019, as required by the Basel Committee on Banking Supervision. The NSFR will require banks to hold enough liquidity or “reliable” sources of funding for any given 12-month period in order to provide a ready buffer during a funding crunch.

The BSP has been introducing tighter regulatory standards under the Basel 3 regime since 2014, which include the 10% capital adequacy ratio, a framework for domestic systemically important banks, the 30-day liquidity coverage ratio and the 5% leverage ratio.

These guidelines are designed to ensure that financial firms hold enough money supply to meet “expected and unexpected cash flows and collateral needs” during day-to-day operations.

“There is continuing review of existing processes to promote efficiency or streamline processes such as the current licensing framework of banks,” Ms. Fonacier added, even as she maintained that the local banking system remains in a “position of strength.”

The BSP official added that local banks have so far been displaying “prudent” risk-taking behavior, allowing them to maintain their solid footing.

Big banks saw net profits climb by 6.8% to a cumulative P146.33 billion in 2017, according to BSP data.

Asset quality continued to improve, with soured debts accounting for just 1.24% of the P7.867-trillion loan portfolio held by the lenders.