Staying afloat: How banks weather turbulence as flood control scandal tests governance

By Abigail Marie P. Yraola, Deputy Research Head

PHILIPPINE economic activity and infrastructure were thrown into disarray after a multibillion-peso flood control scandal erupted in late 2025, which dampened investor sentiment and stalled key infrastructure pipelines.

The banking sector was not spared from this graft controversy as it may await potential challenges such as returning to the Financial Action Task Force’s (FATF) gray list.

Despite the noise and shocks that rocked the local economy during the period, financial institutions have navigated through these choppy waters stronger than expected and managed to stay afloat.

In response, the banking sector’s approach to corruption and governance risks may be noted through implementation of stringent regulatory controls, advanced internal monitoring systems and strategic risk management to ensure financial stability.

The central bank firms its view that the Philippine banking system remains stable and that this financial resilience mirrors strong balance sheet growth, solid profitability, and prudent credit practices.

The Bangko Sentral ng Pilipinas (BSP) said that it monitors indicators of financial soundness such as credit growth, asset quality, liquidity measures, capital adequacy, and profitability to assess the overall financial condition of Philippine banks.

“The BSP also conducts regular stress testing exercises to assess the financial resilience of individual banks and the banking system against shocks or adverse scenarios,” the central bank said in an e-mail interview.

STEERING THROUGH CHOPPY WATERS
Asia United Bank Corp. (AUB)President Manuel A. Gomez said that the market views the public infrastructure and flood control disruptions as compounded threats.

“[These act] as both a macroeconomic drag that dampens investor sentiment and a structural risk to financial stability due to the alarming potential of the Philippines returning to the FATF gray list,” he said in an e-mail interview.

Nicholas Antonio T. Mapa, chief economist at Metropolitan Bank & Trust Co., said that the central bank is committed to ensuring financial market stability as this is one BSP’s key pillars of central banking.

“BSP continuously monitors banks as well as conditions in the financial market. Of late they have announced some adjustments to their liquidity management tools,” he said in an e-mail.

BSP’s role is crucial as it serves as an anchor in the financial system through calibrated monetary policy and strengthened supervision.

Banks adjusting their risk capacity amid political uncertainty should be anchored on institutionalized governance, management systems, and internal controls, Development Bank of the Philippines (DBP) President and Chief Executive Officer Michael O. de Jesus said in an e-mail.

“The Bank (DBP) remains proactive in ensuring that its risk capacity remains resilient through periodic review of its risk appetite, capital and risk management limits, and various risk monitoring tools,” he said.

For the Philippine National Bank (PNB), banks are adjusting their Anti-Money Laundering (AML) risk capacity by reassessing their exposure to increased financial crime risks, such as corruption, bribery, and the misuse of public funds.

“The Bank (PNB) adopts necessary additional controls to address the heightened risks through enhanced due diligence, more conservative onboarding decisions, and enhanced transaction‑monitoring controls, among others,” PNB said in an e-mail interview.

It added that the adjustments help ensure that banks remain resilient and compliant as political instability raises the likelihood of financial crime threats.

For AUB’s Mr. Gomez, banks manage their risk capacity by maintaining disciplined underwriting standards, building a high-quality asset base, running stress tests under adverse governance/policy scenarios, and maintaining robust contingency plans and governance controls.

Mr. Gomez also emphasized that on a macroeconomic level, banks monitor inflation trends, the central bank’s policy rate adjustments, and the momentum of public infrastructure spending are some reforms that could stabilize the banking sector.

On the other hand, he added that at the institutional level, banks can stabilize their operations by diversifying fee income which will help reduce reliance on volatile or extraordinary market gains.

“Financial institutions closely monitor core business expansion, such as the growth in commercial lending, which indicates that business confidence has returned to pre-pandemic levels,” he said.

‘GRAY LIST’ RETURN RISKS
The ongoing graft controversy with flood-control projects puts the country at risk of being placed back in the FATF’s “gray list,” BSP Governor Eli M. Remolona, Jr. said during a media information session held earlier in February.

The country needs to reinforce its defenses to avoid being included by the global financial crime watchdog, especially if this graft controversy shows systemic failures.

In February 2025, the country exited the FATF’s list of jurisdictions under increased monitoring for dirty money risks.

Back in June 2021, the Philippines was put under increased monitoring as the financial crime watchdog identified deficiencies in the country’s measures against anti-money laundering/counter terrorism financing activities.

The Anti-Money Laundering Council (AMLC) said that countries included in the FATF gray list is a burdensome process for banks and other financial institutions.

“This process discourages correspondent banking relationships and international financial flows into the country,” it said.

The cost of being included in the FATF’s gray list may harm the investment climate of the country. It may lead to increased compliance burdens, hinder lower cost cross-border transactions and may diminish financial transparency.

Additionally, it may increase monitoring requirements for foreign banks which may result to higher fees and may negatively impact on overseas workers relying on remittances, among others.

It could also lead to lower investor confidence and reduction in foreign direct investments and may lower capital inflows.

Mr. Gomez of AUB said that this scandal showed that traditional, institution-level AML monitoring often fails to detect procurement-related fraud.

Corrupt syndicates, he said, used “ghost projects” and fragmented their transactions to evade compliance teams.

He stressed that “to address these gaps, regulatory bodies are pushing for cross-institution intelligence sharing and the BSP has enforced stricter protocols on large cash withdrawals to ensure enhanced due diligence is applied automatically.”

For PNB, the unusually large cash withdrawals and suspicious cash flows exposed potential weaknesses in customer due diligence, transaction monitoring, and compliance with reporting obligations.

To address these weaknesses, financial institutions must adopt stronger AML controls to prevent similar failures, it said.

It highlighted that financial institutions are expected to enhance customer due diligence, particularly for high-risk clients and politically exposed people as well as strengthen transaction monitoring to detect unusual cash flows and repeated large-value withdrawals.

PNB also noted that these institutions should strictly comply with the timely reporting of suspicious transactions, especially when accounts linked to public funds show red flags and improve negative news screening and risk reviews.

The bank highlighted that the Philippine government has taken a series of coordinated actions to address issues pertaining to corruption while the AMLC rolled out efforts supporting the government’s asset-recovery drive.

“Together, these actions reflect a multiagency push to strengthen controls over public infrastructure spending,” PNB said.

For AUB, progress must be measured based on FATF-aligned statistics, particularly the number of successful corruption case filings, secured convictions, recovered taxpayer funds, and the transparent resumption of suspended public infrastructure projects.

“For financial institutions, the critical benchmark is the successful deployment of advanced data intelligence and network-level analytics,” Mr. Gomez said.

He also stressed that true progress will be achieved when the banking system can proactively detect and block high-risk public procurement anomalies, assuring stakeholders of fortified resilience against systemic vulnerabilities and illicit exploitation.

CALMING THE WATERS
Countermeasures to shield or stabilize balance sheets from the risks associated with the corruption mess include banks focusing on “sustainable, volume-led growth” by aggressively deploying funds into core commercial lending rather than high-risk sectors, AUB’s Mr. Gomez said.

“From a regulatory standpoint, authorities are aggressively freezing illicit assets, the AMLC has secured freeze orders on thousands of accounts and properties.”

For the central bank, it has implemented structural regulatory reforms that have strengthened the banking system.

These reforms have raised prudential standards, improved governance and risk management frameworks, sharpened supervisory tools, and aligned practices with the best global practices.

“The BSP leverages its supervisory and regulatory oversight to assess emerging balance sheet risks,” the central bank said.

It emphasized that the approach is preventive and structural, aimed at identifying affected exposures and ensuring that any governance weaknesses or integrity concerns do not escalate into broader financial stress.

Additionally, the central bank’s policy on large-value cash transactions strengthens transparency and traceability of higher-risk cash activities, reinforcing banks’ obligations under the AML/counterterrorism financing framework.

“By tightening reporting standards and enhancing risk-based monitoring of unusually large or structured cash movements, the BSP helps prevent the misuse of the financial system for illicit purposes,” it said.

These countermeasures reduce vulnerabilities that could undermine institutional resilience and public confidence.

The central bank also emphasized that it remains committed to safeguarding financial stability through a calibrated supervisory approach and targeted regulatory policy reforms.

Its current priority regulatory policies are anchored on two pillars: fostering resilience and sustaining relevance.

“These reforms ensure that the banking sector remains sound and stable, relevant, and adaptive to support sustainable and inclusive economic growth.”

For PNB, the BSP recalibrates its policies by implementing strict controls on high-value cash transactions through BSP Circular No. 1218 (Regulation on large value cash transactions) issued in September 2025 in response to heightened risks associated with money laundering and corruption.

“This regulation limits cash withdrawals and similar payouts to P500,000 per customer per banking day unless supported by enhanced due diligence.”

It added that the policy mandates that large value payouts must be conducted through traceable, noncash channels.

In late February, the central bank issued Circular No. 1230, increasing the cash withdrawal threshold to P1 million from P500,000 to focus on higher-risk activity while streamlining the process for legitimate and normal cash transactions, including recurring ones.

“The increase follows consultations with banks and industries, which showed a large number of legitimate cash transactions above the original threshold. These covered payouts, such as payroll, loans, and project-based disbursements,” the BSP said in a press release.

For Mr. Gomez, BSP is sustaining a deliberate monetary easing cycle to offset the economic drag caused by recent governance fallouts and delayed public infrastructure spending from a macroeconomic stimulus perspective.

He added that with the Monetary board reducing its key policy rates, this should lower system-wide borrowing costs, support domestic demand, and catalyze economic growth, provided inflation trajectories remain manageable.

The BSP lowered policy rates by 25 basis points (bps) to 4.25% for a sixth straight meeting in its February policy meeting.

This was the lowest in over three years or since the 3.75% in August 2022.

Since its easing cycle in August 2024, the central bank has lowered interest rates by a total of 225 bps, including five straight 25-bp reductions in 2025.

“The BSP is recalibrating by carefully tightening and sequencing macro prudential measures,” said Mr. Gomez.

He added that by communicating clear, transparent policy horizons and reinforcing stringent liquidity and capital adequacy standards, the BSP ensures that institutions maintain the necessary buffers to absorb potential shocks.

STAYING AFLOAT
For DBP’s Mr. de Jesus, strengthening capital adequacy and liquidity, enhancing risk management, diversifying portfolios, and balancing the need for confidentiality and transparency are crucial strategic thrusts for financial institutions.

These can improve money laundering detection capabilities and, in turn, boost consumer trust and confidence in the banking system.

For Mr. Gomez, banks should adopt execution-focused strategies prioritizing disciplined growth, strong funding fundamentals, and diversified recurring income streams.

“Investing in scalable digital platforms helps capture retail growth and improve operational efficiency. Furthermore, institutions must deploy advanced, network-level anti-money laundering intelligence capable of detecting fragmented syndicates to protect the financial system from illicit exploitation,” he said.

The BSP-supervised financial institutions can safeguard the financial system by reinforcing sound governance and risk culture, observing prudent risk-taking, and strengthening operational and cyber resilience.

“Institutions that consistently invest in these fundamentals, while maintaining solid capital and liquidity buffers, are better equipped to absorb shocks and continue supporting households and businesses, even during periods of stress,” the BSP said.

These efforts are complemented by the BSP’s ongoing surveillance, which includes regular stress testing exercises, enhanced supervisory monitoring, and prudential policy enhancements.

“The BSP stands ready to implement appropriate measures, as needed, to help mitigate potential shocks, support market confidence, and promote overall financial stability.”