The Philippine banking system remains operationally sound and fundamentally strong as manifested by mainstream indicators on capitalization, asset quality, and the steady growth of assets, deposits and loans.
The Capital Adequacy Ratio (CAR) of universal and commercial banks (U/KBs) remains high at 15.6 percent as of end-September 2015. The banks’ capitalization remains predominantly made up of Common Equity Tier 1 (CET1), the highest quality among instruments eligible as bank capital. The CET 1 of U/KBs represented 83 percent of reported bank capital, equivalent to 13.0 percentage points out of the CAR of 15.6 percent.
Bank balance sheets continued to expand amid the volatilities in the global financial system. This growth was achieved while maintaining asset quality as the non-performing loans of U/KBs represented just 1.6 percent of the industry’s total loan portfolio at end-December 2015.
The key foundation of the banking system’s strength has been the pursuit of proactive reforms on risk management practices, capital build-up, corporate governance, financial inclusion, financial literacy and consumer protection.
Under its legal authority to supervise the banking system, the Bangko Sentral ng Pilipinas (BSP) implements a comprehensive risk-based approach that is aligned with international best practices. This particularly includes the Basel Committee's standards as articulated in the updated Core Principles for Effective Bank Supervision.
Bank supervision is focused on assuring the financial public of the safety and soundness of individual banks. Aside from the periodic on-site examination of banks, the BSP likewise employs off-site supervision on a continuing basis.
Well-trained (onsite) bank examiners and (offsite) bank supervisors periodically assess whether banks have the requisite overall governance framework to manage emerging risks. This includes mainstream risks on credit quality, market price movements and bank operations. In addition, specialist examination teams are in place to evaluate the effectiveness of a bank's prevention program to ensure bank handling of the risks out of IT and cyber security issues, money laundering and terrorist financing.
The BSP is vested with the legal authority to take appropriate enforcement actions against individual banks and their personnel for violation of banking laws and regulations as well as non-compliance with minimum regulatory standards on governance, risk management and market conduct.
BSP Governor Amando M. Tetangco Jr. noted that “the BSP’s track record demonstrates the will to decisively act by meting sanctions on erring bank directors and officers, restricting imprudent activities, prohibiting unsafe or unsound practices, and even shutting down banks”
He pointed out, nonetheless, that the strength and soundness of the banking system is underpinned by the efforts of the BSP and other government agencies to pursue financial stability as a prudential objective.
“On our own and as a collective body with other financial regulators, we have also focused specifically on the potential build up of systemic risks,” the Governor added. “The issues that we have been assessing covers quite a bit of ground, but they are inter-related by the common strand that they can create comingled risks that can be systemic in nature” he emphasized.
The BSP has established a Financial Stability Committee made up of senior officials while the Financial Stability Coordination Council is made up of the Securities and Exchange Commission, the Insurance Commission, the Philippine Deposit Insurance Corporation, the Department of Finance, the Bureau of Treasury, and the BSP.
All of the reform initiatives are ultimately meant to align the needs of a growing economy with a sound and responsive financial system. “The BSP is very cognizant of the need to nurture financial stability but is also well aware that this must be aligned with the absolute objective of ensuring the integrity of the financial system,” Governor Tetangco noted.
The BSP pointed out how markets, which have become more attractive through financial stability, are also targeted destinations for capital flows. On this basis, the BSP said it has always recognized the urgency to maintain a strong prudential framework towards financial integrity as a necessary complement to financial stability.
Several third parties have commented that the Philippines remains to be in a position of strength amid global volatilities since late 2015. These reforms also enable our banks to perform their role as catalysts of development under the ASEAN Vision 2020.
The reform agenda is a collaborative and ongoing process whose ultimate objective is not just to ensure the safety and soundness of banks but also to widen access to financial services and products that can improve the economic and financial well-being of the public.