Financial systems play a critical role for consumers – both corporates and individuals – because they bridge the aspirations of today with the economic fortunes of tomorrow. Historically, financial systems develop through the banking industry because of the nature of fiat money. In this context, making sure that banks operate in a safe and sound manner is in the public interest. Banks, after all, manage our savings, offer critical services in the transfer of funds and the payment of obligations, while providing a venue for entrepreneurs to pursue their economic plans through credit. Banking authorities nurture this by defining the regulatory framework that encourages innovation while monitoring that banks operate within prescribed governance guidelines.
The Global Financial Crisis (GFC), however, highlighted how the financial system is more than just the sum of its parts. There is a unique sense of “systemic-ness” that arises from the way each market player interacts with another party, creating a network of interconnected and sequenced transactions. This leads to risk choices being interlinked within the network and as a result, societal outcomes that can differ from the intentions of private entities. This provides the basis for the global initiative to manage the health of the financial system as an explicit and separate policy objective. Its focus is on managing so-called “systemic risks” and this is done through macroprudential policy.

Systemic Risk Management

The promotion of “Financial Stability” is a formal mandate that is uniquely ascribed to the Bangko Sentral ng Pilipinas (BSP). This is provided for in the amended BSP Charter (Republic Act No. 11211) which was signed by President Duterte in February 2019.

The objective of “Financial Stability” is to enhance the resilience of the financial system, in its totality and in its components, from shocks. This is done by managing systemic risks that could affect the financial system so that finance continues to be a value proposition to consumers in normal times while remaining resilient when disruptions do arise. This is the overarching global norm in financial system oversight.

Given its different objective, not all bank-specific vulnerabilities are “systemic” just as macroprudential issues cover other issues beyond banking. And since macroprudential policy focuses on interlinked risk behaviors, its concern can extend beyond liquidity or inflation. Welfare consideration, in particular, is handled differently in macroprudential policy because adverse outcomes have a greater impact on society than when expected outcomes are likely to be buoyant.

There is a defined organizational structure in the handling of “Financial Stability.” This structure is centered at the BSP – consistent with our Charter – and works in collaboration with other financial authorities, taking on a holistic view of the financial system. As market conditions evolve and the risk behaviors of stakeholders are constantly rebalancing, the pursuit of Financial Stability has been a journey and some of the more recent developments can be seen in here.

Financial Supervision