By Mariedel Irish U. Catilogo, Researcher

FOR THOSE who lived through the 2008 Global Financial Crisis, the fallout in the international banking scene dominated by the collapse of the Silicon Valley Bank (SVB) earlier this year felt like a déjà vu.

The California-based SVB was the 16th biggest bank in the United States. With a total asset of $209 billion at the end of 2022, the subsidiary of SVB Financial Group became the second-largest bank to fail in US history.

Flush with massive amount of deposits, startup-focused SVB had invested half of its assets in long-term mortgage securities. However, at the beginning of 2022, the US Federal Reserve started to hike its interest rates to counter rising inflation, which pushed the bond prices to fall.

Fueled by the high borrowing costs, SVB’s depositors, majority of which are tech-based companies, decided to withdraw their deposits resulting in a bank run in just two days. In order to raise capital, the bank sold its bond portfolio incurring a loss amounting to $1.8 billion.

By March 10, California regulators shut down SVB and appointed the Federal Deposit Insurance Corp. as its receiver, controlling the assets and liabilities of the distressed bank.

Just two days following the closure of SVB, the New-York based Signature Bank was shut down by federal regulators, making it the third-largest bank failure in US history. The collapse stemmed from the anxiety brought by the prior failure of SVB.

Needless to say, these US banks’ collapse sent a chilling shockwave across the globe.

In the local scene, the government was swift to address concerns arising following the turmoil in the international banking sector.

In a Reuters report, Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said Philippine banks have “no reported exposure” to the SVB citing that banks’ foreign currency deposit units’ assets are mostly loans, Philippine dollar bonds, and sovereign bonds of countries with high credit ratings.

“One big difference relative to the 2008 Global Financial Crisis is the paradigm shift we are witnessing from an era of low inflation and accommodative monetary policies to a context of high inflation and tighter monetary policies,” International Monetary Fund (IMF) Resident Representative to the Philippines Ragnar Gudmundsson said in an e-mail.

The Fed has raised borrowing costs by a total of 500 basis points (bps) since March 2022, bringing the Fed funds rate to 5-5.25% due to stubbornly high inflation. Meanwhile, the BSP has hiked the key policy rate by 425 bps to 6.25%.

The Philippine banking system is well capitalized and has liquidity buffers, said Mr. Gudmundsson. The banks’ “conservative” risk management practices and well-diversified portfolios helped them to withstand possible shocks and higher interest rates.

Bankers Association of the Philippines (BAP) Jose Teodoro K. Limcaoco said that the country’s banking sector has enough liquidity and capital ratios that could minimize foreign shocks.

“Prudential measures are in place for big US banks and all Philippine banks to maintain their liquidity cover ratios… these regulatory limits have kept the Philippine banking system less susceptible to the mentioned risks,” Mr. Limcaoco, who also sits as the president and chief executive officer of Bank of the Philippine Islands, said in an e-mail.

Over the years, the BSP’s efforts to enhance its regulatory framework to strengthen the resilience of the banking industry have been effective. Through the Basel III — an international set of reform measures developed by the Basel Committee on Banking Supervision that aimed to promote stability of the financial sector worldwide — BSP has set the local standard higher than the minimum required.

The BSP has implemented new minimum capital ratios of 6% Common Equity Tier 1 (CET1) ratio, 7.5% Tier 1 Capital ratio. Both ratios are above the 4.5% and 6% minimum, respectively.

Likewise, it set its Total Capital Adequacy Ratio (CAR) at 10%, higher than the required 8%. CAR indicates the banks’ ability to absorb losses from risk-weighted assets.

Fitch Ratings’ Asia-Pacific Financial Institutions Director Tamma Febrian said that while the SVB’s collapse may not have a substantial impact to the country’s bank and financial system, he noted that a set of secondary effects can affect the banking sector indirectly.

“We are referring to secondary effects in the form of potentially tighter regulatory requirements relating to liquidity or interest rate risk management over the medium term,” Mr. Febrian said in an e-mail.

According to the Fitch Ratings’ report titled “What Investors Want to Know: APAC Banks Navigating Global Uncertainty,” the debt watcher sees no immediate need to amend its bank rating criteria.

“The major Philippine banks are funded by a broad base of diverse and relatively granular deposits that reduces the risks of a sudden and severe drawdown of deposits. Banks’ balance sheets remain liquid, and the Fitch-rated banks are among the largest domestic banks that are likely to be beneficiaries of deposit flight during times of general market stress,” he said.

The country’s big bank’s liquid assets, which are assets that can be quickly converted to cash if needed to meet certain obligations, reached P9.06 trillion as of end-March, up by 2.9% from P8.8 trillion as of end-February this year. This was also 9% higher compared with P8.31 trillion in end-March last year.

Meanwhile, the liquid assets to deposit ratio of the universal and commercial banks was 54.38% in end-March, up from 53.93% in end-February but lower than the 54.90% in end-March 2022.

“Nevertheless, SVB’s collapse has reverberated across financial systems around the world, bringing closer regulatory scrutiny on the reliability of banks’ funding and the quality of their assets. The current impetus to restore financial stability could also have repercussions on global central banks’ monetary policy settings that affect interest rate trajectories,” Mr. Febrian said.

Nikita Anand, associate director at S&P Global Ratings, believed that the Philippine banks’ strong capital and retail deposit base will help the sector to withstand tough operating conditions.

She expects limited contagion effects from the international bank turmoil despite secondary effects brought by global events.

“Investment portfolios form about 28% of total assets, with 70% of the exposure in safe government securities. Moreover, the banking sector’s deposits have significant contribution from household deposits which adds stability to Philippine banks’ funding profile,” Ms. Anand said in an e-mail.

Mr. Gudmundsson emphasized the importance of preemptive measures to protect financial markets from emerging corporate vulnerabilities and possible external shock that may trigger a reduction in a bank’s liquidity.

“Financial regulators should consider strengthening the resolution framework for financial institutions and the insolvency regime for corporates. In addition, further reforms to deepen the domestic capital markets will contribute to better provision and distribution of liquidity,” he said.

For Mr. Limcaoco, a reduction in the reserve requirement ratio (RRR) could help in further strengthening the banks to lessen intermediation costs and will allow banks to allocate and maximize its resources.

The reserve requirement ratio is the share of bank deposits and deposit substitute liabilities that they must park with the central bank which they cannot lend out.

The BSP is eyeing to bring down the big banks’ RRR to single digits this year. Currently one of the highest in the region, mandated reserve for universal and commercial banks stands at 12%. RRR for thrift and rural banks are at 3% and 2%, respectively.