THE Development Budget Coordination Committee (DBCC) said there is a need to monitor concentration risks arising from banks’ investments in government securities as well as recent efforts to boost domestic liquidity amid the pandemic.

In its Fiscal Risks Statement for 2021, the DBCC said banks hold P2.2 trillion of outstanding National Government (NG) securities or 42.9% of the total. The bulk (86.8%) are government bonds at P1.9 trillion, while the Treasury bills are at P300 billion.

“At the onset of the COVID-19 global pandemic, the Bangko Sentral ng Pilipinas (BSP) complemented the government’s liquidity management program through some extraordinary measures, such as the P300 billion repurchase agreement with the NG. The BSP also opened the window for purchases of government securities in the secondary market. Given the substantial investment of banks in government securities and recent government initiatives to boost domestic liquidity and address the extraordinary liquidity requirements of the economy, careful monitoring of concentration risk is deemed necessary,” the report said.

Concentration risk refers to the level of risk in a bank’s portfolio arising from concentration in a single counterparty, sector or country.

These risks may become an issue when the need for liquidity arises for banks, said National Treasurer Rosalia V. de Leon.

“If there is herd behavior due to need for liquidity by banks because of high NPLs (nonperforming loans), banks may trigger [a] sell-off of government securities, So as in anything, [there is] need to diversify,” Ms. De Leon said in a text message to BusinessWorld.

A sell-off would mean lower prices and higher yields at which the government will have to pay its debt through government securities, she said.

Ms. De Leon said this is why they want to have more buy-side institutional investors for securities with long maturities.

The banking industry’s NPL ratio stood at 2.67% as of end-July, up from the 2.53% seen in June and the highest in six years or since the 2.74% logged in August 2014, based on data from the BSP. Gross bad loans — or those left unpaid for at least 30 days after the due date — jumped by nearly a third to P290.1 billion from P219.6 billion in July 2019.

The BSP projects the industry’s NPL ratio to reach 4.6% by end-December.

The central bank has assured there remains ample liquidity in the financial system. In July, M3 — which is considered to be the broadest measure of money supply — rose by 14.5% year on year to about P13.6 trillion, slightly slower than the 14.9% expansion in the prior month.

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said the DBCC rightly took note of the “relatively high” concentration of holders of outstanding NG securities.

“Having a high concentration of types of owners could lead to a situation wherein market players would act in a similar fashion when faced with a turn in market sentiment,” Mr. Mapa said via e-mail.

“The DBCC may also be wary that a potential sell down in the bond market could lead to substantial losses for bond holders, majority of which are banks, who would then in turn face challenges to carry out their function as financial intermediaries should their cash flows and balance sheets come under pressure.”

The DBCC’s statement is only cautionary given government securities are among the safest investments, said Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort.

“As a matter of prudence, credit risk needs to be diversified to address concentration risk in one or a few issuers or simply not putting all eggs in one basket,” he said in a text message.

“One alternative is to also encourage further diversification of investors in government securities to include more investors locally (i.e. from the investing public) and from overseas (i.e. more foreign investors), as part of capital market development, thereby also reducing reliance on banks as the biggest investors of government securities,” he added. — Luz Wendy T. Noble with inputs from Beatrice M. Laforga

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