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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.

Macroprudential Framework

 

The term “Financial Stability” took on a specific context as a result of the GFC. It is now specifically understood to mean as addressing the build up of systemic risks which in turn is defined as disruptions to the financial system that can adversely affect the real economy. Macroprudential policy is the means for mitigating these systemic risks.

 
The Financial Stability Coordination Council (FSCC), led by the BSP, made publicly available the country’s Macroprudential Policy Strategy Framework. This document reflects the Council’s thinking, the institutional arrangements as well as the tools that will be used to sustain and enhance the health of the financial system. This health is specifically defined in terms of the system’s resilience against “systemic risks.” It also highlights the collaborative nature inherent to the FSCC.

Institutional Arrangements

 

Effectively managing systemic risks is a shared undertaking across many different stakeholders. As such, the objective of Financial Stability warrants an institutional arrangement to ensure continuous focus while setting clear accountabilities.

Recent Initiatives

 

The BSP has been focusing on financial stability since mid-2009 but, in this journey, the most notable developments have arguably transpired more recently. This section contains the recent initiatives of the BSP and the FSCC in the collective pursuit on Financial Stability.

Financial Supervision

Supervisory framework

 

Banking regulations

 

Directories of supervised FIs

Banking statistics

Advisories for supervised FIs

Islamic Banking