Central bank flags potential systemic risks from global recession

By Luz Wendy T. Noble, Reporter

THE central bank vowed to ensure financial stability in the market, as it raised the possibility that “systemic risks may materialize” due to the global recession.

“Systemic risks may seem like a high-level concept but it really just means that financial authorities are looking for any sign that the operations of the financial market may be impaired to the detriment of the general public,” BSP Governor Benjamin E. Diokno said in a statement after a  meeting with the Financial Stability Policy Committee (FSPC).

Systemic risk is the potential for an event at the company level to trigger severe instability or the collapse of an entire industry or economy.

“Pursuing financial stability requires us to manage systemic risks and we do this because our primary goal is to protect the welfare of the public,” he said.

Pressed for details, Mr. Diokno said the FSPC is looking into many factors to gauge the possibility of systemic risks.

“For example, was the economy weak or strong at the start of the pandemic? What’s the country’s debt-to-GDP ratio? How strong or weak the banking system [is] before the pandemic and so on. As you can see, no two countries are alike,” Mr. Diokno said in a text message.

In July, Mr. Diokno said they had yet to see any indications that the financial market had been impaired as a result of the pandemic.

In a bid to manage financial stability, the FSPC said ensuring liquidity will be critical to recovery and the transition to a new economy.

“Among the steps that the FSPC is considering is a new instrument that will allow banks to mobilize the liquidity already with them by taking a view on future GDP (gross domestic product) growth,” the BSP said.

It said boosting risk assessment practices for bank credit “is continuously aligned with spot yields in the securities market.”

Most lenders implemented more stringent lending standards for both enterprises and households due to reduced tolerance for risk as the pandemic raged, a BSP study showed. The same trend was seen during the global financial crisis.

Risk management systems imposed by regulators are vital to guard against systemic risks that may materialize, said Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort.

“If banks have huge losses from loan defaults, that could threaten their capital. Large market losses is also a risk to bank’s capital, that is why regulators have placed limits on trading activities,” he said in a text message.

Impaired and impacted banks may in turn be unable to act as financial intermediaries which are much needed at a time of crisis, said ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa.

“More businesses will close, incomes will drop further, loan payments will freeze and banks will get hit again and so on and so forth,” Mr. Mapa said in an e-mail.

Mr. Ricafort said banks have been required by BSP to have a business continuity plan to ensure continued operation even in the face of extreme situations such as calamities and the current pandemic.

Gross nonperforming loans (NPL) or credit unsettled at least 30 years past due date surged 26.7% to P273.6 billion in June from P215.9 billion a year ago. This, as the industry’s total credit portfolio dipped 1.27% to P10.82 trillion from P10.96 trillion in June last year.

With this, the banking industry’s gross NPL ratio stood at 2.53% from 2.43% in May.

The BSP expects NPL to reach around 4.6% by end-December 2020 due to the pandemic. This is much lower than the 17.6% peak in 2002 at the aftermath of the Asian financial crisis.

“If banks come under fire due to souring loans, it may drag the economy further into recession and government will need to step in to save the system from imploding,” Mr. Mapa said.

Amid the rise in bad loans, lenders have beefed up provisions for credit losses by 48.5% year on year to P300.3 billion in June.

Banks’ capital adequacy ratio stood at 12.73% as of end-June, well beyond the 10% minimum required by the BSP.

Amid the possibility that such systemic risks can materialize, Mr. Mapa said the government has the responsibility to address the main problem.

“[The] government needs to do all it can to nip the risk in the bud by addressing the root cause of the systemic risk, which is the drop in income and loss of jobs caused by the pandemic. Prevention always trumps the cure and the government may end up spending more if it waits for these systemic risks to materialize,” Mr. Mapa said.