THE CENTRAL BANK should expand its macroprudential policy toolkit and establish operational procedures in a more systemic risk-based approach, the International Monetary Fund (IMF) said in a technical note.

The technical note was crafted under the Financial Sector Assessment Program (FSAP), a joint program of the IMF and the World Bank that aims to provide a detailed framework to identify vulnerabilities in the system and develop appropriate policy responses.

The IMF highlighted the importance of the Bangko Sentral ng Pilipinas (BSP)-led Financial Stability Coordination Council and other financial regulators in improving systemic risk monitoring by reducing data gaps.

“Closing the data gap is essential for systemic risk analysis, which cover some key vulnerabilities, such as real estate, non-financial corporations’ condition (the offshore and foreign currency borrowing) and its link to conglomerate groups and banks, that need to be closely monitored,” the IMF said.

The data gaps cited by the IMF include lack of information on granular credit risks, including a fully operational national credit registry, current collateral values and loan-to-value ratios, small and unlisted nonfinancial corporations (NFCs) and household indebtedness and survey, and detailed depositor information due to the bank secrecy.

In another technical note, the IMF said the coronavirus disease 2019 (COVID-19) is an immediate risk to financial stability in the Philippines. The FSAP said it conducted a series of macro-financial analyses to assess the effects of the COVID-19 crisis and related policies.

FSAP models showed Philippine NFCs are likely to experience distress if domestic and global gross domestic product (GDP) contract sharply in the severe baseline.

The shocks are expected to reduce corporate earnings across different sectors, especially in the energy, consumer discretionary, and industrial sectors.

For banks, this could increase nonperforming loans significantly without private and public sector actions or economic recovery. While its impact can be mitigated, the IMF said this may only delay and not prevent eventual bankruptcy if the health crisis lasts longer.

“While banks can withstand the exceptionally severe shocks in the baseline, they could experience a systemic solvency impact if additional downside risks materialize,” the IMF said.

“The BSP should enhance its macro scenario stress testing exercises,” it added.

The IMF said currently, no units or sectors conduct macro-scenario stress testing, which is one of the essential tools for financial stability analysis.

“The BSP should start such exercises. There is no single best practice about how to organize stress testing work. Several units and sectors could work jointly, or different sections could conduct distinct exercises depending on their objective,” the IMF said.

In another technical note, the IMF said the Philippine economy and in turn, the financial system, is also highly vulnerable to climate change risks.

Simulated scenarios show that disruptions due to extreme typhoons could affect economic growth in the Philippines.

“The paths for GDP show that for both current and future scenarios, typhoons with 10- and 25-year return period give less than one standard deviation shock to GDP, which is also smaller than the shock to the Philippines during the Global Financial Crisis or Asian Financial Crisis episodes,” the IMF said.

“The difference between current and future scenarios is also small. The severity of the GDP impact and the difference between current and future scenarios becomes starker for tail events. In particular, the impact of a 500-year return period typhoon on real GDP is comparable to that of COVID-19.”

These threats from climate change could cause significant risks to financial stability, the multilateral lender said.

“Without other extreme tail events, such as a pandemic, climate change in the future would reduce bank capital ratio visibly only in the tail events once in 500 years,” the IMF added.

Authorities should also conduct more exploratory work to examine the potential impact of climate change. Inter-agency collaboration, including with non-economic agencies such as the Philippine Atmospheric, Geophysical, and Astronomical Services Administration, Department of Energy and Department of Agriculture, is critical, it said. — K.B. Ta-asan