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No indication financial markets are impaired ‘irreparably’ by pandemic

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THE country’s financial system can withstand the coronavirus crisis, which has not caused any irreparable damage so far, the Philippine central bank governor said on Tuesday.

“We do not see any indications as of yet that our financial market has been impaired irreparably,” Mr. Diokno, who also heads the Financial Stability Coordination Council (FSCC), said at the online launch of the Macroprudential Policy Strategy Framework: the Case of the Philippines.

He noted the current crisis differs from previous downturns, where the aim was to maintain the health of the financial system to avoid any adverse impact on the broader economy.

“The challenge today, however, is the exact opposite. You want to be sure that the difficulties do not spill over from the economy to the financial market,” Mr. Diokno said.

He said interest rates are also lower than during the global financial crisis of 2007. Regulatory relief is seen to help financial markets weather risks, he added.

The central bank slashed its benchmark interest rate by 175 basis points this year to a record 2.25%.

“With the lower rates, we can also better manage longer-term uncertainties,” Mr. Diokno said.

The FSCC on Tuesday released the framework on how it uses macroprudential policies to manage systemic risks in the financial system.

“We offer to the public that no less than the secretary of Finance, the heads of the SEC (Securities and Exchange Commission), IC (Insurance Commission), PDIC (Philippine Deposit Insurance Corp.) as well as the BSP, regularly assess the changing jigsaw puzzle of risk behaviors. We are joined by the Bureau of the Treasury and we collaborate with many agencies and associations to come up with a holistic view of what’s happening and then decide — using this framework that we make available — on what else can be done,” Mr. Diokno said.

PDIC President Roberto B. Tan said systemic risk is beyond the size of balance sheets.

“It is no longer about a bank but how the failure of such a bank affects the economy or how failure elsewhere affects some banks, which can trigger another round of vulnerabilities,” Mr. Tan said.

The local banking industry’s capital adequacy ratio was at 15.4% on a standalone basis and 16% on a consolidated basis as of end-2019. Both were better than the 10% minimum requirement set by the central bank. The nonperforming loan ratio stood at 2.43% in May from 2.31% in April, as businesses struggled amid the lockdown.

Banks have also set aside higher loan provisions as they took into account the impact of the crisis. In May, bank allowances for credit losses rose by 26.7% year on year to P253.4 billion.

The FSCC also noted one of the lessons during the global financial crisis is that the interplay between credit and the real economy “is much more dynamic than previously thought.”

Amid the pandemic, Mr. Diokno said banks are often looked at as a source of loans. He said the FSCC appreciates the “balance of risk,” given that loans are funded by consumer deposits.

“The P10.4 trillion in loans outstanding for the banking system as of May is rather being funded by the P12.1 trillion in peso deposits,” he said.

According to the framework, a bank failure is a direct concern for depositors who are fully aware of where their funds are going.

“Since banks are highly leveraged institutions, available capital will never be enough to pay off all deposits in the event of liquidation. This is a public welfare issue and this is why banking is a licensed activity, supported in part by financial safety nets such as deposit insurance,” FSCC said.

Mr. Diokno said the second quarter will likely be worse than the first quarter, given that the economic fallout from the pandemic is broader than initially thought. He said a prudent approach would be a calibrated reopening of the economy as it transitions to a new normal.

“The council wants to be sure that the financial system is an enabler of recovery. There should be enough liquidity in the system to meet the uncertainties that may be priced into market yields,” Mr. Tan said. — Luz Wendy T. Noble





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