High capitalization, liquidity to help banks weather crises

PHILIPPINE BANKS remain well-capitalized and highly liquid, which will help them withstand credit and market shocks during crises, the Bangko Sentral ng Pilipinas (BSP) said. 

The BSP has continued to implement structural reforms to ensure the financial strength and safety of its supervised banks, it said in an e-mail to BusinessWorld.

“The adoption of sound governance and risk management standards, prudential limits and requirements including the Basel III reforms on capital and liquidity standards — with due regard to proportionality — has enabled banks to maintain their resilience and withstand possible credit and market shocks even during crises,” the central bank said. 

The regulator has issued principles-based rules for its BSP-supervised financial institutions. This approach is more flexible and risk-based, focusing on providing guidance rather than being prescriptive as banks have varied business models, it said.

Latest data from the BSP showed banks’ capital adequacy ratios (CARs) were higher than the regulatory minimum and international standards as of end-2022.

The banking system’s solo and consolidated CARs stood at 15.7% and 16.3%, respectively, well above the BSP’s 10% minimum requirement and the 8% set by the Bank for International Settlements.

Meanwhile, universal and commercial banks’ solo and consolidated Basel III leverage ratios stood at 8.8% and 9.3% respectively, also higher than the BSP’s 5% requirement and the 3% international standard.   

“The Basel III LCR requires banks to maintain high-quality liquid assets that can be readily converted to cash at little or no loss of value so that the bank can withstand an assumed 30-day liquidity stress that may arise from run-off of deposits, tightening of funding source, or unscheduled drawdown on the bank’s committed but unused credit and liquidity facilities,” the BSP said.

It added that this would give lenders more time to implement structural measures needed to address any emerging or underlying issues.

Banks were also able to meet the BSP’s liquidity and funding requirements. The liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) of banks were both above the 100% thresholds as of end-2022.

The universal and commercial banking industry’s solo and consolidated LCRs stood at 185.7% and 185.4%, respectively. Meanwhile, the NSFR of the sector stood at 137.4% and 138.1% on solo and consolidated bases, respectively, as of end-December 2022.

“The NSFR complements the LCR by promoting resiliency over a longer-term time horizon through creating additional incentives for banks to fund their activities with more stable sources of funding on an ongoing structural basis,” the BSP said.

The NSFR also encourages funding stability, limits over-reliance on short-term wholesale funding, and boosts better assessment of funding risk across on- and off-balance sheet items, it said.

Standalone thrift banks, rural banks, and cooperative banks likewise maintained adequate proportions of liquid assets against their liabilities, the central bank said.

The minimum liquidity ratios of standalone banks as of end-2022 reached 29.9%, 63.7%, and 44.4%, respectively, on a solo basis, all above the 16% minimum requirement.

Still, even as the Philippine banking system remains stable and healthy, financial institutions are expected to develop the appropriate systems, disclose liquidity risks, and undergo supervisory assessments to manage and address potential challenges, the central bank said.

“To ensure their compliance and effectiveness in managing liquidity risk, banks are expected to establish appropriate systems for measuring and managing liquidity risks, have a robust liquidity risk policy and governance framework, maintain liquidity cushion and contingency plans, report and disclose liquidity risk information, and undergo regular supervisory assessments,” the BSP said.

Stress testing is a crucial aspect of banks’ risk management system and capital planning process as it allows lenders to assess the level of liquidity they should hold and construct scenarios that could pose difficulties for specific business activities, it said.

“By conducting stress tests, banks can effectively manage risk exposures, promote strong risk governance, and ensure their ability to withstand adverse economic conditions or financial shocks,” it said.

Regular meetings with the banks’ management to discuss strategic and recovery plans also allows the BSP to assess the risk appetite and emerging risk exposures of banks.

The BSP also has enforcement tools that it can deploy to ensure the stability of the banking system.

“As the country recovers and transitions to a post-pandemic economy, the BSP remains committed to adopting prudential standards that will strengthen corporate and risk governance, promote digital transformation, and advance sustainable finance,” the BSP said.

“All these are intended to foster a resilient, dynamic, and inclusive financial system that is supportive of sustainable economic growth,” it added. — K.B. Ta-asan