BSP @ 31: Shaping the financial landscape towards sustainable growth

A central bank needs to accomplish a few things in its service to the nation: among which are monetary policy, which involves controlling the money supply and interest rates to achieve macroeconomic objectives such as controlling inflation, managing employment levels, maintaining economic stability; the regulation and supervision of banks and other financial institutions; and acting as the banker, financial advisor, and fiscal agent for the government.

Additionally, central banks manage foreign currency reserves to stabilize the national currency and ensure liquidity, and they often serve as lenders of last resort during financial crises to maintain confidence in the financial system.

In celebrating the 31st anniversary of the Bangko Sentral ng Pilipinas (BSP), reflecting on its history is essential to appreciating its contributions to the country. From navigating economic crises to implementing forward-thinking monetary policies, the BSP has played a crucial role in shaping the financial landscape of the Philippines and promoting sustainable economic growth, serving as a true bulwark to economic progress.

When the Filipinos first conceptualized the BSP, it came as part of the processing of the Hare-Hawes Cutting bill, the Philippine independence bill approved by the US Congress. But it was not until after the Japanese occupation did the country first see the concept come to life. Until then, the country’s monetary system was administered by the Department of Finance and the National Treasury.

In 1946, after the Philippines fully gained its independence, President Manuel Roxas tasked Finance Secretary Miguel Cuaderno, Sr. to draft a central bank charter. The task became an imperative a year later as a result of the findings of the Joint Philippine-American Finance Commission, which studied Philippine financial, monetary and fiscal problems in 1947, recommending a shift from the dollar exchange standard to a managed currency system.

Republic Act No. 265 officially established the Central Bank of the Philippines (CBP) on Jan. 3, 1949. This action was crucial in the changeover to a controlled currency system from the old dollar exchange standard.

The CBP underwent several transformations to better address the country’s economic needs. In 1972, then President Ferdinand E. Marcos issued Presidential Decree No. 72, which expanded the bank’s authority to regulate the entire financial system. Further amendments in 1981 strengthened the financial system, increasing the CBP’s capitalization from ₱10 million to ₱10 billion.

The modern BSP, as Filipinos know it today, was established on July 3, 1993. A month before, then President Fidel V. Ramos signed Republic Act No. 7653, the New Central Bank Act, into law in compliance with a 1987 Constitutional mandate.

(Front row, from left) Asian Development Bank Senior Financial Sector Specialist Kelly Hattel, Philippine Space Agency Deputy Director-General Denis F. Villorente, BSP Deputy Governor Mamerto E. Tangonan, Monetary Board Member Rosalia V. De Leon, Deputy Governor Chuchi F. Fonacier, Assistant Governor Lyn I. Javier, Department of Information and Communications Technology’s National Broadband Program Project Director Antonio Edward E. Padre, BSP Managing Director Eugene C. Teves, Deputy Director Alona H. Isidro, Bank Officer Ma. Ciefrel T. Desquitado, (second row, second from left) BDO Network Bank, Inc. First Vice-President Norman Vic C. Aycocho and the participants of the Rural Bank Strengthening Program Technology and Innovation Forum at the BSP Head Office in Manila last May 31 — Photo from bsp.gov.ph

The fundamental goal of the BSP, an autonomous monetary institution that will be established in accordance with the law, is to maintain price stability as the previous Central Bank charter simply made reference to this goal in passing. Additionally, the Bangko Sentral now has fiscal and administrative autonomy granted by law, which the previous Central Bank did not.

Now, the BSP maintains its duty to promote and maintain price stability, while creating a strong financial system, and a safe and efficient payments and settlements system conducive to a sustainable and inclusive growth of the economy. All this under a vision of becoming recognized globally as the Philippines’ central monetary authority and primary financial system supervisor that supports a strong economy and promotes a high quality of life for all Filipinos.

And throughout its history, the BSP has been successfully recognized as such for its regulatory excellence and initiatives in financial literacy and inclusion. For instance, in 2013, it was named the Best Macroeconomic Regulator in the Asia-Pacific Region by The Asian Banker. It got this recognition once more in 2017​​.

Most notably, the BSP was acknowledged at the Asian Banker Leadership Achievement Award Virtual Ceremony 2020 as the Best Systemic and Prudential Regulator in Asia-Pacific, as part of The Asian Banker Regulation & Supervision Awards. This comes as an achievement, proving the central bank’s undeniable service as a guardian of financial stability during the COVID-19 crisis.

“BSP has focused on prudent oversight of financial institutions to ensure financial stability amid increased uncertainty. The prudential measures aim to enable the financial system to assist micro, small and medium enterprises (MSMEs) and large enterprises to carry on businesses during the COVID-19 crisis and hasten recovery and sustainability of their operations,” The Asian Banker wrote.

Bangko Sentral ng Pilipinas (BSP) Research Academy and the Department of Agriculture’s (DA) Agricultural Credit Policy Council (ACPC) launched the regional public information campaign on the “2022 Countryside Bank Survey” report in Naga City on June 4. Photo shows Agricultural Credit Policy Council Director Magdalena Casuga, BSP Principal Researcher Dr. Veronica Bayangos, Regional Director Tomas Cariño, and Researchers Ferdinand Co (front row, seventh to tenth from left) and Jade Eric Redoblado (third from right). — Photo from bsp.gov.ph

“It has served as a guardian of financial stability during the COVID-19 crisis and implemented prudential relief measures to assist BSP supervised financial institutions (BSFIs), and support households and business enterprises. The measures serve to complement the BSP’s existing regulatory relief policies and set a uniform and systematic approach in granting regulatory relief for banks.”

Furthermore, the BSP has been recognized for implementing appropriate strategies to address the increasing demand for digital channels in its efforts for digitizing the Philippine economy.

During the pandemic, the BSP established regulations to guarantee retail clients’ access to official financing channels and to encourage and heavily utilize information technology for financial operations. The BSP also loosened know-your-customer (KYC) regulations in order to make official funding channels more accessible. Meanwhile, to effectively control the rising number of financial crimes and cyberattacks due to digitization, it advised BSFIs to remove fees and charges for using online banking or e-money and to implement adequate strategies to accommodate the growing demand for digital channels.

BSP Governor and Financial Stability Coordination Council (FSCC) Chairman Eli M. Remolona, Jr. (third from left) led the launch of the 2023 Financial Stability Report (FSR) at the BSP head office in Manila last Feb. 13. Also in photo are members of the FSCC Executive Committee, namely (from left) SEC Commissioner Kelvin Lester K. Lee, PDIC President Roberto B. Tan, SEC Chairman Emilio B. Aquino, PDIC Senior Vice-President Sandra A. Diaz, and FSCC Technical Secretariat Head and BSP Senior Assistant Governor Johnny Noe E. Ravalo. — Photo from bsp.gov.ph

Benjamin E. Diokno, who served as BSP Governor at the time, in his acceptance speech said: “The BSP continues to be front and center of the Philippines’ COVID-19 economic response by ensuring ample liquidity in the financial system, providing regulatory relief to banks and implementing policies to assist Filipino businesses and households weather and recover from the crisis.”

Towards a shared prosperity

In a speech in March, BSP Governor Eli M. Remolona, Jr. noted three challenges the BSP is facing this year: the challenge of monetary policy, digitization, and deepening the country’s capital markets.

The central bank head addressed the complexities of managing monetary policy in an economy increasingly affected by supply shocks. Unlike the past, today’s economy faces frequent disruptions from oil, food, and fertilizer price surges. These shocks have driven inflation to peak at 8.7% in January 2023, the highest in 14 years, although it has since been reduced to 3.4% due to effective monetary measures. Mr. Remolona emphasized the challenge of managing second-round effects, where initial price hikes lead to broader inflation that is much slower to recede. He hopes that by targeting inflation within a 2%-4% range, the central bank has anchored expectations, making these persistent second-round effects easier to handle.

Monetary Board Chairman and Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. (fourth from left) leads the ceremonial toast of the annual reception for the banking community hosted by the BSP at the Fort San Antonio Abad in Manila last January. — Photo from bsp.gov.ph

In addition to stabilizing inflation, Mr. Remolona outlined ambitious plans to further the BSP’s plans to digitalize the country’s banking and payment systems, with key initiatives like the Open Finance Framework, which enables banks to use APIs (application programming interfaces) for better service integration, and the promotion of digital banking despite cultural hurdles in loan collection.

“Open finance means working with application programming interfaces (APIs). These platforms connect you to other financial services and connect your customers to other financial services. Then, you have to figure out how to integrate that platform into your system,” he said.

“But banks now are working with 50 [to] 100 APIs doing many different things,” he continued. “Our role here is to make sure that when you use your customers’ data, you use it with their permission. They still own the data; you do not own that data. Your customers own their data and want to ensure that when you use that data with APIs or other platforms, you get their permission first, and then you can do whatever you like.”

BSP Assistant Governor Arifa Ala (center), one of WOMANi’s “Most Influential Women in Islamic Business and Finance,” receives award from (from left) Professor Humayon Dar, chairperson of the WOMANi Programme and director-general of the Cambridge Institute of Islamic Finance, and Pakistan’s Finance Minister Dr. Shamshad Akhtar. — Photo from bsp.gov.ph

He also noted that a regulatory sandbox will allow innovators to test new concepts with regulatory guidance, minimizing uncertainties. He also acknowledged the growing influence of generative AI, advocating for human oversight to prevent errors.

“The regulator is there to help you and tell you what the regulatory implications might be if you succeed. We are not there to judge whether you will succeed or not. We are just there to help you. If you grow, you know what you are getting into regarding regulations. It is about minimizing regulatory uncertainty. If you have a new idea, enter a sandbox. We will assign you a regulator. We will scold you, ‘Bawal ’yan’ (‘That’s not allowed’); but that is for your own good.”

Mr. Remolona highlighted efforts to extend digital payments to the unbanked through e-wallets and simplified accounts, aiming to integrate more people into the formal financial system. He also introduced Project Nexus, an ASEAN initiative to connect fast payment systems across member countries by 2026, facilitating efficient cross-border remittances.

Turning to capital markets, he stressed the need for a reliable benchmark yield curve to enhance liquidity and stability. He proposed adopting a swaps curve, which has proven effective in Europe, to address existing market issues.

For another measure, he called for a more inclusive corporate bond market, urging for a range of credit ratings beyond predominantly triple-A issues. Furthermore, the central bank governor discussed the importance of attracting passive investment flows by resolving barriers such as withholding taxes and improving the country’s inclusion in major global indices.

Mr. Remolona’s vision is clear: adapt monetary policy to manage supply shocks effectively, digitalize the financial system to enhance inclusion and efficiency, and deepen capital markets to attract diverse investments. His strategic approach aims to fortify the Philippine economy against future challenges while fostering sustainable growth and financial innovation. — Bjorn Biel M. Beltran