THE CENTRAL BANK plans to roll out more rules to manage credit risks, a senior official said, explaining that the new regulations will enable banks to be more flexible in pricing loans for retail clients.
Bangko Sentral ng Pilipinas (BSP) Deputy Governor Chuchi G. Fonacier said that monetary authorities are preparing “enhancements” on current standards for operational risk management this year.
“We will also be issuing guidelines on risk-based approach to pricing to help ensure that the exposures of BSFIs (BSP-supervised financial institutions) to risks associated with lending/financing activities are adequately compensated,” Ms. Fonacier said in a recent e-mail interview.
“The adoption of risk-based pricing framework, particularly for consumer loans, would help differentiate risks among bank borrowers, allowing those with good credit quality/standing to enjoy lower interest rate.”
Currently, banks impose higher borrowing rates for retail creditors, considering this segment riskier than big businesses.
Benchmark interest rates have risen by 175 basis points (bp) following five consecutive rate hikes fired off by the BSP in 2018 to rein in inflation. In turn, this has pushed market yields higher by 98.7 bp as of October, as banks passed on the higher cost of money to the public.
Also on the table are additional guidelines which are designed to improve the ability of banks to weather potential shocks which could affect their image and, ultimately, their operations.
“Two key reforms in this area include the issuance of standards on model risk management and reputational risk management,” Ms. Fonacier added.
These changes will accompany the implementation of the international Basel 3 framework effective Jan. 1 this year, consisting of prudential measures meant to better ensure solid footing for big lenders.
These steps guarantee that banks will not fold even during a funding crunch, using lessons learned from the 2008 Global Financial Crisis. Back then, excessive lending led to massive credit defaults, which then triggered the collapse of big banks and caused recession worldwide.
The planned reforms will also ensure that banks can stay intact despite incidents that could deal a blow to their reputation.
Ms. Fonacier noted that monetary authorities are also “currently reviewing” Basel 3 standards in place to make sure that these remain attuned to the needs of Philippine lenders. These include capital-based requirements for improved resilience to potential losses, a standardized approach to credit and counterparty credit risk, operation risk and capital floors and amendments to the regulatory framework for domestic systemically important banks. — Melissa Luz T. Lopez