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Reforms Support Sustained Stability and Growth of the Financial System

10.25.2016

The Philippine financial system remained sound and stable in the first semester of 2016 as the pursuit of continuing reforms supported the sustained growth. With the banking system at its core, the financial system continued to provide needed funding to a growing economy.

During the review period, the BSP issued additional Basel III reforms aimed at improving banks’ liquidity standards1, mitigating systemic risk through the recovery plan on domestic systemically important banks or DSIBs, continuing enhancement in risk management oversight and corporate governance standards and strengthening prudential rules on connected lending and related party transactions.
 
Accordingly, the banking system posted an annual asset growth of 12.2 percent to P12.5 trillion supported by double-digit credit expansion. Banks also maintained an improved loan quality of 2.2 percent, positive bottom line of P78.9 billion and capital adequacy ratio (CAR) of 16.1 percent2.

Funding remained largely sourced from retail and peso deposits of residents.  Meanwhile, foreign currency deposit liabilities comprised 21.6 percent of total deposit liabilities. Banks were generally compliant with the required asset and liquid asset cover ratios of 100 percent and 30 percent, respectively.

Total resources of the trust industry stood at P2.8 trillion, closer to its P3.0 trillion level recorded at end-June 2013. It is the peak for the five-year review period (end-June 2012 to end-June 2016), prior to the effectivity of Memorandum No. M-2013-021.  Said memorandum constrained the access of trust accounts to the BSP’s Special Deposit Account (SDA) facility, allowing only the access for Unit Investment Trust Funds (UITF). This led to the shift to deposit in banks and investments in financial assets from cash and due from BSP, which boosted the asset expansion.

Other non-bank financial institutions similarly exhibited prudence in their overall risk-taking activities and provided sufficient capital buffer against unforeseen shocks from their operating environment i.e., rising interest rates.

Notwithstanding the sustained positive performance of the financial system, the BSP continues to carefully monitor potential sources of vulnerabilities and implement timely and calibrated reforms address potential risks. This is in line with the BSP’s objective of promoting greater financial stability.

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1 Refers to Liquidity Coverage Ratio (LCR) and its disclosure standards under Circular No. 905 dated 10 March 2016
2 Preliminary. Data on consolidated basis as of end-June 2016.

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