## INTRODUCTION ## Source details **Canonical URL:** [INTRODUCTION](https://www.imf.org/-/media/files/publications/cr/2020/english/1phlea2020003.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1phlea2020003.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1phlea2020003.pdf.json) --- ### Key overview - BSP’s regulatory framework described as "broadly effective for the size and complexity of the Philippine banking system," but "legislative gaps continue to hinder effective supervision of banks." - BSP has "a well-resourced, experienced and highly committed staffing complement," with "ongoing need to develop and maintain adequate expertise in certain complex areas (e.g., risk modelling)." - Since 2002 FSAP and 2010 assessment update: "significant progress" made; however "significant weaknesses in the legislative framework, arising notably from the bank secrecy laws and the lack of power for the BSP to supervise the parent companies and their affiliates of banking groups, present a material hindrance to effective supervision." ### Recent legal, regulatory and supervisory developments - BSP Charter update (February 2019): - formalizes financial stability mandate; - "extends the scope of supervised entities"; - "grants additional authority to force banks to hold capital beyond the minimum regulatory requirement when needed." - BSP "aims to implement the full Basel framework" and has introduced Core Basel III elements including: - capital definition amendments; - higher capital minima requirements; - Liquidity Coverage Ratio (LCR); - Net Stable Funding Ratio (NSFR); - leverage ratio; - framework for D-SIBs; - amendments to core banking supervision legislation and numerous guidelines. - Finalized guidelines/amendments since on-site BCP assessment (selected, exact citations preserved): 1. Circular No. 1042–25 July 2019 — Guidelines on Investment Activities of BSP‑Supervised Financial Institutions; 2. Circular No. 1044–6 August 2019 — Guidelines on the Management of Interest Rate Risk in the Banking Book and amendment to the Guidelines on Market Risk Management; 3. Circular No. 1079–9 March 2020 — Revised Risk-Based Capital Adequacy Framework for Stand-alone Thrift, Rural and Cooperative Banks; 4. Circular No. 1051–27 September 2019 — Amendments to the Framework for Dealing with D-SIBs; 5. Circular No. 1064–3 December 2019 — Report on Intraday Liquidity of Universal and Commercial Banks and their Subsidiary Banks/Quasi-Banks; 6. Circular Nos. 1074 and 1075–7 February 2020 — Amendments to Regulations on Financial Audit of Banks and NBFIs. ### Ongoing and needed supervisory work - BSP updating guidelines on: - large exposures; - interest rate risk in the banking book; - market risk management; - model risk management; - country and transfer risk capturing the investment side; - Pillar 3 disclosure requirements. - BSP needs to develop guidance on: - banks’ internal credit risk models; - intra-day liquidity reporting. - Liquidity monitoring tools, specifically "cash flow mismatch reporting," need review and alignment with Basel standards. ### Legislative and supervisory constraints identified - Bank secrecy laws: - "all bank deposits with banking institutions in the Philippines are considered to be of an absolutely confidential nature and may not be examined, inquired or looked into by any person, including the BSP, except in defined circumstances." - Recommendation (verbatim): "BSP should be granted unimpaired access to information on all customer accounts, and the ability, without constraints, to employ and share depositor information for any prudential purpose (e.g., funding concentrations from related parties, intra-group dependencies, cash flow analysis, related-party transactions (RPT) and off-site anti-money laundering (AML) data and analysis)." - Group/parent supervision limitation: - BSP cannot supervise a bank’s parent or wider group, nor review their activities to determine impact on bank/group safety and soundness. - RA No. 1121 grants limited data authority "for 'statistical and policy development purposes'" but "does not provide the BSP with sufficient powers to assess any potential negative impact the activities of those companies may have on the safety and soundness of the banking group." - Limitations on BSP enforcement powers "impair its ability to fully protect the bank from the actions of parent companies and affiliates." - Ultimate Beneficial Ownership (UBO): - BSP can govern transfers greater than 10 percent of voting shares of a bank, but "current laws and regulations do not enable BSP to address transfers by or assess suitability of UBO or significant indirect controlling interests of banks." ### Resolvability and Prompt Corrective Action (PCA) - BSP’s ability "to assess the resolvability of banks, especially D-SIBs, and support the orderly resolution of a problem bank, including the preparedness for effectively dealing with a major bank failure needs to be developed." - Recommendations (verbatim highlights): - "Continue improvements to the Prompt Corrective Action (PCA) framework and ensure failed or failing banks are resolved 'in a prompt and timely fashion.'" - "Incorporate an assessment of resolvability into its supervisory framework, especially for D-SIBs, in conjunction with the PDIC." - Ensure PCA operates to require firms to be placed into resolution at an early stage and before equity has been exhausted, and that legal/regulatory framework ensures timely transition of problem banks to the PDIC to avoid losses to the deposit insurance fund and mitigate moral hazard risks. ### Institutional responsibilities and coordination - BSP responsibilities include: - prudential regulation and supervision of banks, nonbanking entities, money service businesses, credit granting entities and payment system operators; - central monetary authority for money, banking and credit; - oversight of payment and settlement systems and critical FMIs. - Other authorities: - Securities and Exchange Commission (SEC) — supervises corporate sector and capital markets; maintains company register. - Insurance Commission (IC) — supervises insurers and mutual benefit associations. - Philippine Deposit Insurance Corporation (PDIC) — government-run deposit insurer and "principal resolution authority for insured institutions"; protection up to PhP 500,000 to depositors. - Coordination bodies: - Financial Stability Co-ordination Council (FSCC) — voluntary; BSP Governor chairs; MOA signed January 2014. - Financial Sector Forum (FSF) — BSP, SEC, IC and PDIC; meet six times per year. ### Banking sector structure and key statistics (as of end‑June 2019 unless noted) - Banking sector accounted for "approximately 76 percent of the financial system’s total resources," or "98 percent of the nominal Gross Domestic Product (GDP)," as of end‑June 2019. - Note: BSP website indicates "approximately 83 percent" when excluding insurance and mutual fund assets. - BSP supervised financial institutions: "554 banks, 1,214 nonbank financial institutions and 2 off-shore banking units." - Banking sector asset composition: - "46 universal and commercial banks representing 91.3 percent of total bank assets"; - "3 government banks (14.4 percent of total bank assets)"; - "51 thrift banks (7.2 percent of total bank assets)"; - "457 rural and cooperative banks (1.5 percent of total bank assets)." - "30 foreign banks were approved and authorized to operate by the BSP in the Philippines," representing "only 7.2 percent of the total banking system assets as at end of June 2019." - Table 1 summary lines (as presented): Total financial system assets "23,263 Billion PHP", "100 percent", "130 Percent of GDP". ### Risk drivers and vulnerabilities - Primary risk drivers: "global macro-financial developments," amplified by corporate sector vulnerabilities and real estate markets. - Corporate vulnerabilities: "Some corporate vulnerability indicators started to deteriorate in the past couple of years despite their strong levels." - Conglomerate risks: "complex mixed conglomerate structures" can amplify corporate sector risks. - Real estate exposures: "Loans to booming real estate market is close to the regulatory cap of 20 percent of total loans." - D‑SIBs: - BSP has identified a number of D‑SIBs; many belong to larger Philippine conglomerate groups and some are foreign bank branches. - D‑SIBs required to hold additional capital, including a capital conservation buffer "2.5 percent." - BSP introduced a countercyclical capital buffer, currently set at "0 percent." --- ### Banking sector metrics, asset quality, liquidity and capital ### Key metrics (exact figures preserved) - Consolidated capital adequacy ratio: 15.9 percent. - Common equity tier 1 capital (CET1) on a consolidated basis: 14.5 percent. - Liquidity coverage ratio (LCR) of the universal and commercial banks (stand-alone data as of end‑October 2018): 173.1 percent. - Minimum BSP CAR referenced: 10 percent. - Minimum liquidity ratio for stand-alone thrift, rural and cooperative banks: 20 percent. - Gross loans account for 60 percent of assets. - Real estate lending share of the loan portfolio: about 17 percent. - NPL ratios (end‑June 2019): - Average NPL ratio: 2.1 percent. - Thrift banks NPL ratio: 5.9 percent. - Rural/cooperative banks NPL ratio: 11.4 percent. - NPL coverage ratio (end‑June 2019): 93.3 percent (includes general allowance provision of 100 basis points). - PFRS 9 adoption effective January 1, 2018; BSP requirement: universal and commercial banks must maintain a minimum general allowance of 100 basis points as a floor to expected credit loss provisioning. - Deposit composition (end‑June 2019): savings accounted for 46 percent of deposits. - Returns: - Annualized return on assets (ROA): 1.2 percent. - Annualized return on equity (ROE): 9.8 percent. - Net interest margin (NIM): 3.6 percent. ### Macro context and preconditions for supervision - Philippine economic growth: strong growth of over 6.3 percent between 2010–2018. - Inflation: - 2018 inflation: 5.2 percent; - Year‑on‑year inflation as of June 2019: 3.4 percent. - Overall debt‑to‑GDP ratio: 43.7 percent. - BSP Charter amended to formalize statutory mandate of promoting and maintaining financial stability. - National Payment Systems Act effective October 2018; BSP oversight covers PhilPaSS and the National Retail Payment System. --- ### Crisis management, resolution, deposit insurance and PCA performance ### Framework status and PDIC role - Framework for crisis management, recovery and resolution is under development. - FSCC approved the Financial Crisis Management and Resolution (FCMR) Framework, but "additional legislative resolution tools and crisis preparedness measures are needed for potential failure of a major bank." - PDIC: - Acts as liquidator for smaller member financial institutions and has charter authority to conduct special examinations and take prescriptive action. - PDIC and BSP carry out joint examinations of member institutions in resolution phases. - BSP’s Monetary Board (MB) makes final decision on PDIC liquidation. - PDIC does not currently play a role in review of D‑SIB recovery plans or assessment of resolvability of a major bank. ### Emergency liquidity assistance - BSP has authority to provide emergency loans and advances to banks within prescribed limits and conditions as outlined in the Republic Act. ### Transparency, accounting and disclosures - Philippine Financial Reporting Standards (PFRS) adopted in 2005; PFRS 9 effective January 1, 2018. - Major banks required to disclose financial statements to enable evaluation of risks from financial instruments and their management of those risks; not Pillar 3 compliant. - Publicly traded domestic banks subject to SEC disclosure requirements. ### PCA performance and time‑to‑resolution (exact figures preserved) - Historical and recent average periods to resolution of PCA status: - For banks initiated into PCA from years 2006 to 2014: average time period to resolution spanned 4.64 years. - For banks initiated into PCA from 2015 to present: average period to resolution of PCA status is 2.14 years from PCA initiation. - Observed problems: - PCA can linger for prolonged periods (years) while banks remain capital deficient. - PCA framework has not consistently operated to require firms be placed into resolution at an early stage and before equity exhaustion. - Recommendation (verbatim): "BSP is encouraged to continue ongoing revisions to the PCA framework and implement policies and procedures that will operate to ensure that firms placed into PCA status are addressed in a timely fashion, constrain undue regulatory forbearance, and place firms into resolution in a prompt and timely fashion." --- ### Supervisory framework, approach, tools and reporting ### Organizational and methodological changes - Reorganization effective January 1, 2019: Financial Supervision Sector (FSS) subdivided into subsectors including Policy and Specialized Supervision Subsector (PSSS) and Financial Technology Subsector (FTSS); on‑site and off‑site functions integrated into Financial Supervision Departments (FSDs). - Current staffing complement of front‑line supervisors in FSSS: 682. - BSP financed solely from income generated from its own operations; recruitment and remuneration competitive; indemnity protections under S. 15 (e) of NCBA. ### Risk‑based supervision and tools - Supervisory methodologies and tools include: - CAMELS Rating and Risk Assessment System (SG No. 2009‑21); - ROCA Rating System for foreign bank branches; - ICAAP requirements (Circular No. 639) for universal and commercial banks; - Uniform Stress Testing Framework conducted twice a year (June and December); - Bank Performance Report (BPR), Bank Dashboard and "Heat Map" (scale 1–4). - Supervisory reporting requirements (Appendix 7 of the MORB — exact listing preserved) include 1) Financial Reporting Package (FRP); 2) Published Balance Sheet; 3) Capital Adequacy Ratio Report; 4) Report on Real Estate Exposures; 5) Liquidity Coverage Ratio Report/Minimum Liquidity Ratio Report; 6) Leverage Ratio Report; 7) Report on Material Related Party Transactions; 8) Conglomerate Structure; 9) Credit and Equity Exposures aggregating Php 1.0 million and above; 10) FX Position Report; 11) ICAAP Document and Recovery Plan; 12) Uniform Stress Testing Report; 13) DOSRI Report; 14) Report on Required Reserves; 15) Report on Crimes and Losses; 16) Annual Report. ### Data quality, validation and enforcement - Circular No. 963 and CL‑2018‑074 set reporting expectations and validation rules; S. 171 classifies report non‑compliance (Erroneous, Delayed, Unsubmitted) with monetary penalties, demerit point system and non‑monetary sanctions for habitual offenders. ### Large exposures and concentration limits - Current weaknesses: - "BSP does not impose a single borrower limit on banks at a consolidated level." - BSP exposure draft proposes to: 1. Revise LE definition: tighten capital base from qualifying capital to Tier1 capital and change ratio from 5 percent to 10 percent; 2. Adopt prudential limit on LEs of 25 percent of Tier 1 capital; 3. Expand criteria for economic interdependence and measurement methodology; 4. Require reporting of large exposures both solo and consolidated. - Recommendation (verbatim): Update regulations to ensure limits are calculated both on a solo and consolidated basis. ### Model risk, market risk and IRRBB - Market risk: - Two material market risks: IRRBB and FX risk. - Appendix 42/Appendix 70 provide market risk and IRRBB guidance; assessment: Largely Compliant for market risk; Largely Compliant for IRRBB. - Lack of clarity over allocation between trading and banking books noted; proposed updates expected to address ambiguity. - Internal models: - Annex A of Appendix 42 and Annex A of Circular 360 describe qualifying standards and allow BSP to attach conditions and a multiplication factor; BSP has approved internal market risk models for two banks. - Recommendation (verbatim): "Issue the proposals on a revised market risk framework and on risk management guidelines on investment activities." ### Liquidity risk and monitoring - LCR framework: - LCR effective January 1, 2019; universal and commercial banks required to maintain LCR of 100 percent daily. - LCR reporting: monthly (solo) and quarterly (consolidated). - Observed gap: contractual maturity mismatch reporting does not include overnight to 14‑day buckets; recommendation to introduce additional time buckets including overnight to align with Basel standard. - NSFR: - Circular 1007: NSFR applies to all universal and commercial banks on solo and consolidated basis; NSFR required to be at least 100 percent daily since January 1, 2019. - Minimum Liquidity Ratio (MLR): - Circular 996: MLR for stand‑alone rural, thrift and cooperative banks set at 20 percent. - Recommendation (verbatim): - "Review the monitoring tools for the LCR to align them more closely with applicable Basel standards, including introduction of a more granular cashflow mismatch report;" - "Introduce an ILAAP framework to enable the BSP to set individual liquidity and funding requirements for banks above the statutory minimum to reflect the particular liquidity and funding profiles of those banks;" - "Implement an intraday liquidity reporting regime." --- ### Main supervisory findings, assessments and policy recommendations (selected by theme) ### Responsibilities, objectives, powers, independence (CP 1–2) - Assessment of Principle 1: Materially Non‑Compliant. - Key weaknesses: - Bank secrecy laws constrain BSP’s ability to identify depositors and access depositor information for prudential purposes. - BSP lacks full power to regulate and examine parents or affiliates of supervised firms; RA No. 1121 data authority limited and unused. - MB composition includes a Cabinet member (one vote) raising concern about perceived operational independence. - Recommendations (verbatim): - "Amend the bank secrecy laws to grant BSP full access to banks’ deposit and other data;" - "Provide BSP with the legal authority to review the activities of a bank’s parent companies and of companies affiliated with parent companies’ activities to determine their impact on the safety and soundness of the bank and the banking group;" - "Make the MOA between the BSP and PDIC public to provide greater transparency around the responsibilities of the two authorities;" - "Establish a bilateral agreement between the BSP and CDA to formalize co‑ordination and data‑sharing arrangements between the two authorities." ### Licensing, changes in control, and acquisitions (CP 4–7) - Assessment of Principle 5: Largely Compliant. - Key findings and recommendations (verbatim highlights): - Amend licensing criteria to ensure review of suitability of ultimate beneficial owners where applicable. - Clarify grounds for revocation including when applications are based on false information. - Mandate more frequent review/monitoring of newly licensed banks. ### Supervisory cooperation and cross‑border supervision (CP 3, 12, 13) - Assessment of Principle 3: Compliant. - Findings: - MOAs and bilateral agreements with domestic and foreign regulators provide effective framework; recommendation to negotiate MOA with the SSM to replace existing BaFin MOA and establish formal MOA with CDA. - BSP encourages establishing formal colleges of supervisors domestically. ### Supervisory approach, techniques and resolvability (CP 8–11) - Assessment: - Principle 8: Largely Compliant. - Principle 9: Compliant. - Principle 11: Largely Compliant. - Key recommendations (verbatim highlights): - "Develop and implement, in conjunction with PDIC, policies and standards to assess resolvability of firms and promptly resolving banks, especially D‑SIBs, in an orderly fashion;" - "Continue ongoing revisions to the PCA framework and implement policies and procedures that will operate to ensure that firms placed into PCA status are addressed in a timely fashion and placed into resolution in a prompt and timely fashion;" - "Develop and implement policies and standards regarding the supervisory approach to ring‑fence the bank from actions of parent companies, subsidiaries, and other related companies that could impair safety and soundness." ### Capital, credit risk, provisioning, concentration, RPTs, market, liquidity, AML (CP 16–29) - Capital (Principle 16): Assessment Largely Compliant. Recommendations include setting individual capital ratios based on risk profile and introducing simplified ICAAP for rural, thrift and cooperative banks. - Credit risk (Principle 17): Largely Compliant. Recommendations: - "Develop guidance on the management/use of internal models to measure credit risk;" - "Establish a concentrated area of credit expertise;" - "Conduct thematic/horizontal credit reviews across larger FIs..." - Problem assets/provisioning (Principle 18): Compliant. Recommendation to change loan loss provisioning guidance for less sophisticated banks and align expectations with SEC guidance. - Concentration and large exposures (Principle 19): Largely Compliant. Recommendation: update regulations to calculate single borrower limits and aggregate large exposure limits on both solo and consolidated bases. - Related party transactions (Principle 20): Compliant. BSP’s RPT framework is broader than Basel and supervisory practice is effective; continued off‑site surveillance recommended. - Market risk and IRRBB (Principles 22–23): Largely Compliant. Recommendation to implement revised market risk and IRRBB guideline proposals. - Liquidity risk (Principle 24): Largely Compliant. Recommendations preserved above on LCR monitoring, ILAAP and intraday reporting. - Abuse of financial services / AML/CFT (Principle 29): Largely Compliant. Recommendations: - "Increase contingent of AML risk specialists to ensure the effectiveness of its AML/CFT supervision program;" - "Ensure consistent use of the monetary penalty regime when banks are found in non‑compliance with AML and CFT requirements." --- *Source: 1phlea2020003 — INTRODUCTION (IMF staff summary and BCP assessment excerpts).* ### INTRODUCTION _________________________________________________________________________________ 6 ### INTRODUCTION ### Key overview - The BSP’s regulatory framework is "broadly effective for the size and complexity of the Philippine banking system," but "legislative gaps continue to hinder effective supervision of banks." - The BSP has "a well-resourced, experienced and highly committed staffing complement," but "there is an ongoing need to develop and maintain adequate expertise in certain complex areas (e.g., risk modelling)." - Since the FSAP in 2002 and the assessment update in 2010, the BSP has made "significant progress" but "significant weaknesses in the legislative framework, arising notably from the bank secrecy laws and the lack of power for the BSP to supervise the parent companies and their affiliates of banking groups, present a material hindrance to effective supervision." ### Recent legal, regulatory and supervisory developments - BSP Charter update (February 2019) formalizes financial stability mandate, "extends the scope of supervised entities," and "grants additional authority to force banks to hold capital beyond the minimum regulatory requirement when needed." - The BSP "aims to implement the full Basel framework and is in the process of doing so." - Core Basel III elements introduced since the most recent assessment include: - capital definition amendments; - higher capital minima requirements; - Liquidity Coverage Ratio (LCR); - Net Stable Funding Ratio (NSFR); - leverage ratio; - framework for D-SIBs; - amendments to core banking supervision legislation and numerous guidelines. ### Ongoing and needed supervisory work - BSP is updating guidelines on: - large exposures; - interest rate risk in the banking book; - market risk management; - model risk management; - country and transfer risk capturing the investment side; - Pillar 3 disclosure requirements. - BSP needs to develop guidance in: - banks’ internal credit risk models; - intra-day liquidity reporting. - Liquidity monitoring tools, specifically "cash flow mismatch reporting," need review and alignment with Basel standards. - Since the on-site BCP assessment, the BSP has finalized guidelines/amendments not reviewed in this assessment, including: 1) Guidelines on Investment Activities of BSP-Supervised Financial Institutions (Circular No. 1042–25 July 2019); 2) Guidelines on the Management of Interest Rate Risk in the Banking Book and amendment to the Guidelines on Market Risk Management (Circular No. 1044–6 August 2019); 3) Revised Risk-Based Capital Adequacy Framework for Stand-alone Thrift, Rural and Cooperative Banks (Circular No. 1079–9 March 2020); 4) Amendments to the Framework for Dealing with D-SIBs (Circular No. 1051–27 September 2019); 5) Report on Intraday Liquidity of Universal and Commercial Banks and their Subsidiary Banks/Quasi-Banks (Circular No. 1064–3 December 20190); 6) Amendments to Regulations on Financial Audit of Banks and NBFIs (Circular Nos. 1074 and 1075–7 February 2020). ### Legislative and supervisory constraints identified - Bank secrecy laws: "all bank deposits with banking institutions in the Philippines are considered to be of an absolutely confidential nature and may not be examined, inquired or looked into by any person, including the BSP, except in defined circumstances." - Recommendation: "BSP should be granted unimpaired access to information on all customer accounts, and the ability, without constraints, to employ and share depositor information for any prudential purpose (e.g., funding concentrations from related parties, intra-group dependencies, cash flow analysis, related-party transactions (RPT) and off-site anti-money laundering (AML) data and analysis)." - Group/parent supervision limitation: BSP cannot supervise a bank’s parent or wider group, or review their activities to determine impact on bank/group safety and soundness. - BSP obtained power to obtain data from entities "including parent and affiliate companies for 'statistical and policy development purposes'," but this is "limited" and "does not provide the BSP with sufficient powers to assess any potential negative impact the activities of those companies may have on the safety and soundness of the banking group." - Limitations on BSP enforcement powers "impair its ability to fully protect the bank from the actions of parent companies and affiliates." - Ultimate Beneficial Ownership (UBO): BSP can govern transfers greater than 10 percent of voting shares of a bank, but "current laws and regulations do not enable BSP to address transfers by or assess suitability of UBO or significant indirect controlling interests of banks." ### Resolvability and Prompt Corrective Action - BSP’s ability "to assess the resolvability of banks, especially D-SIBs, and support the orderly resolution of a problem bank, including the preparedness for effectively dealing with a major bank failure needs to be developed." - Recommendations: - Continue improvements to the Prompt Corrective Action (PCA) framework and ensure failed or failing banks are resolved "in a prompt and timely fashion." - "Incorporate an assessment of resolvability into its supervisory framework, especially for D-SIBs, in conjunction with the PDIC." - Ensure PCA operates to require firms to be placed into resolution at an early stage and before equity has been exhausted, and that legal/regulatory framework ensures timely transition of problem banks to the PDIC to avoid losses to the deposit insurance fund and mitigate moral hazard risks. ### Institutional and market structure — Institutional responsibilities - BSP responsibilities: - prudential regulation and supervision of banks, nonbanking entities, money service businesses, credit granting entities and payment system operators; - central monetary authority for money, banking and credit; - oversight of payment and settlement systems and critical financial market infrastructure. - Other authorities: - Securities and Exchange Commission (SEC): supervises corporate sector, capital market participants and securities/investment instruments markets; maintains company register. - Insurance Commission (IC): supervises life and non-life insurers, mutual benefit associations, and trusts for charitable uses; issues and can suspend/revoke licenses for agents/underwriters etc. - Philippine Deposit Insurance Corporation (PDIC): government-run deposit insurer and "principal resolution authority for insured institutions"; membership mandatory; protection up to PhP 500,000 to depositors. - Coordination bodies: - Financial Stability Co-ordination Council (FSCC): BSP, regulators and DOF; voluntary; chaired by BSP Governor; meets quarterly; MOA signed January 2014 to formalize representation and working groups. - Financial Sector Forum (FSF): BSP, SEC, IC and PDIC; meet six times per year to exchange information and coordinate policies. ### Banking sector structure and key statistics (as of end-June 2019 unless otherwise noted) - Banking sector accounted for "approximately 76 percent of the financial system’s total resources," or "98 percent of the nominal Gross Domestic Product (GDP)," as of end-June 2019. - Note: BSP website indicates banking sector assets accounts for "approximately 83 percent" of the financial systems total resources as this ratio does not include insurance and mutual fund assets. - BSP supervised financial institutions: "554 banks, 1,214 nonbank financial institutions and 2 off-shore banking units." - Banking sector asset composition: - "46 universal and commercial banks representing 91.3 percent of total bank assets"; - "3 government banks (14.4 percent of total bank assets)"; - "51 thrift banks (7.2 percent of total bank assets)"; and - "457 rural and cooperative banks (1.5 percent of total bank assets)." - "30 foreign banks were approved and authorized to operate by the BSP in the Philippines," representing "only 7.2 percent of the total banking system assets as at end of June 2019." - Table 1 (summary lines presented in source): Total financial system assets "23,263 Billion PHP", "100 percent", "130 Percent of GDP" (data as presented in the source table). - Note: number of institutions is as at end-June 2019; data on NBFIs as of end-March 2019 except Insurance Mutual as of end-June 2019. ### Risk drivers and vulnerabilities - Primary risk drivers: "global macro-financial developments," with amplification from corporate sector vulnerabilities and real estate markets. - Corporate vulnerabilities: "Some corporate vulnerability indicators started to deteriorate in the past couple of years despite their strong levels." - Conglomerate risks: "complex mixed conglomerate structures" can amplify corporate sector risks. - Real estate exposures: "Loans to booming real estate market is close to the regulatory cap of 20 percent of total loans." - D-SIBs: - BSP has identified a number of D-SIBs; many belong to larger Philippine conglomerate groups and some are foreign bank branches. - D-SIBs required to hold additional capital, including a capital conservation buffer "2.5 percent." - BSP introduced a countercyclical capital buffer, currently set at "0 percent." *Source: 1phlea2020003 - INTRODUCTION* ### 15.9 percent on a consolidated basis, well above the BSP (10 percent) and BIS prescribed minimum ### 15.9 percent on a consolidated basis, well above the BSP (10 percent) and BIS prescribed minimum requirements ### Banking sector metrics and liquidity/capital ratios - Consolidated capital adequacy ratio: 15.9 percent. - Common equity tier 1 capital (CET1) on a consolidated basis: 14.5 percent. - Liquidity coverage ratio (LCR) of the universal and commercial banks (stand-alone data as of end-October 2018): 173.1 percent. - Minimum BSP requirement referenced: 10 percent. - Stand-alone thrift, rural and cooperative banks: subject to a simplified minimum liquidity ratio; the minimum ratio is set at 20 percent. ### Asset composition, asset quality, and provisioning - Gross loans account for 60 percent of assets. - Real estate lending share of the loan portfolio: about 17 percent. - Non-performing loan (NPL) ratios (reported at end-June 2019): - Average NPL ratio: 2.1 percent. - Thrift banks NPL ratio: 5.9 percent. - Rural/cooperative banks NPL ratio: 11.4 percent. - NPL coverage ratio (end-June 2019): 93.3 percent, which includes the general allowance provision of 100 basis points. - PFRS 9 adoption effective January 1, 2018. - BSP requirement following PFRS 9: universal and commercial banks must maintain a minimum general allowance of 100 basis points as a floor to expected credit loss provisioning. ### Deposits, profitability, and margins - Deposit composition (end-June 2019): savings accounted for 46 percent of deposits. - Returns: - Annualized return on assets (ROA): 1.2 percent. - Annualized return on equity (ROE): 9.8 percent. - Net interest margin (NIM): 3.6 percent. ### Macroeconomic context and preconditions for supervision - Philippine economic growth: strong growth of over 6.3 percent between 2010–2018. - Inflation and currency developments: - Inflation in 2018: 5.2 percent (above target). - Year-on-year inflation as of June 2019: 3.4 percent (within target). - Some volatility in the Philippine Peso in 2018; monetary policy actions addressed these issues. - Overall debt-to-GDP ratio: 43.7 percent. - BSP Charter amended to formalize a statutory mandate of promoting and maintaining financial stability. - Financial Stability Coordination Council (FSCC): BSP coordinates with other agencies to promote financial stability. ### Public infrastructure, accounting and oversight - Legal and regulatory framework: - Business laws (corporate, bankruptcy, contract, consumer protection, private property) exist. - Professionals (accountants, auditors, lawyers) subject to transparent and ethical standards with oversight by regulatory boards. - National accounting and auditing standards are substantially equivalent to international principles. - External auditors of supervised entities of the BSP, SEC and IC are subject to a stringent accreditation standards program overseen by the SEC. - Supervisory roles: - BSP, SEC and IC have well defined rules to govern and supervise the banking sector, financial markets and insurance sector respectively. - Credit information: - Credit Information System Act (2008) established a central credit bureau and the Credit Information Corporation. - Statistics and public information: basic economic, financial and social statistics made available to the public through various government websites. - Payments system oversight: - BSP has primary regulatory responsibility for the payments system, including systemically important payment systems and FMIs. - National Payment Systems Act effective October 2018; covers BSP oversight of PhilPaSS and the National Retail Payment System. ### Crisis management, resolution, and deposit insurance - Framework status: - Framework for crisis management, recovery and resolution is under development. - FSCC approved the Financial Crisis Management and Resolution (FCMR) Framework, but additional legislative resolution tools and crisis preparedness measures are needed for potential failure of a major bank. - Agencies, including BSP, are creating FCMR handbooks to develop individual agency crisis preparedness plans. - PDIC role: - PDIC acts as liquidator for smaller member financial institutions and has charter authority to conduct special examinations and take prescriptive action. - PDIC and BSP carry out joint examinations of member institutions in resolution phases. - BSP’s Monetary Board makes final decision on PDIC liquidation. - PDIC does not currently play a role in review of D-SIB recovery plans or assessment of resolvability of a major bank. - Emergency liquidity assistance: - BSP has authority to provide emergency loans and advances to banks within prescribed limits and conditions as outlined in the Republic Act. ### Transparency and accounting disclosures - Philippine Financial Reporting Standards (PFRS) adopted in 2005; PFRS 9 effective January 1, 2018. - Major banks are required to disclose financial statements to enable users to evaluate risks from financial instruments and their management of those risks; not Pillar 3 compliant. - Publicly traded domestic banks subject to SEC disclosure requirements. ### Main supervisory findings and recommendations (by theme) - Responsibilities, objectives, powers, independence (CP 1–2) - Weakness: bank secrecy laws prevent BSP from identifying names of depositors except in defined circumstances, constraining effective supervision (e.g., identifying funding concentrations from related parties, intra-group dependencies, cash flow analysis, RPT and off-site AML data and analysis). - Concern: Monetary Board composition includes a Cabinet member (one vote) which raises concerns about perceived operational independence. - BSP lacks full power to regulate and examine parents or other affiliates of supervised firms; new authority to obtain certain data from parents is limited in scope and unused to date. - Licensing, changes in control, and acquisitions (CP 4–7) - Recommendation: update licensing standards to clarify examination of suitability of ultimate beneficial owners and set objective criteria to ensure applicants have adequate and consistent governance, internal controls and risk management systems upon commencing operations. - Procedures should mandate on-site examinations upon initiation and more frequent review of newly licensed banks. - Need clear legal/regulatory authority for transfer of significant ownership or controlling interest and for assessing ultimate beneficial owners; current NCBA-based thresholds and definitions are insufficient. - Supervisory cooperation and cross-border supervision (CP 3, 12, 13) - BSP has MOAs supporting information sharing and cooperation domestically and with foreign authorities; existing arrangements provide an effective framework. - Majority of D-SIBs are within conglomerate structures including non-regulated parents/affiliates outside BSP’s perimeter; BSP’s consolidated supervision does not capture risks from the wider group. - Recommendations: - Consider bringing financial entities regulated by other domestic agencies into the consolidated banking groups to capture risks they pose. - In the interim, strengthen coordination with other domestic regulators via formal colleges of supervisors. - Require BSP-regulated banks in conglomerates to identify risks from wider group in ICAAP and describe controls for reporting/managing such risks. - Supervisory approach (CP 8–10) - BSP maintains an effective and evolving supervisory system moving toward more forward-looking, risk-based oversight; employing effective examination techniques and tools. - Gap: supervisory approach does not include assessment of resolvability of supervised institutions in conjunction with PDIC; assessing resolvability of D-SIBs requires an effective early intervention and resolution framework and comprehensive information on group interconnections. - Corrective and sanctioning powers (CP 11) - BSP has appropriate enforcement powers, but remediation timeframes can be extensive; issues can linger in PCA for prolonged periods while banks remain capital deficient. - Recommendation: strengthen effectiveness and timeliness of PCA framework to ensure unhealthy banks are addressed promptly. - Limitation: inability to take direct action against non-regulated parent companies and affiliates impairs BSP’s capacity to ring-fence banks from detrimental parent actions. - Corporate governance and internal audit (CP 14, 26) - BSP strengthened corporate governance regulations aligned with updated Basel Core Principles. - Regulations place primary responsibility for risk management framework and controls with boards of directors; BSP recognizes proportionality and sets minimum requirements for less complex banks. - BSP expects banks to demonstrate strong internal control environments and internal audit functions; regulations amended to address need for strong compliance functions. - Capital (CP 16) - Capital framework for major banks appropriate and more conservative than applicable Basel standards; leverage ratio set at more conservative levels. - Capital framework for stand-alone rural, thrift and cooperative banks is being revised to align more closely with Basel III. - Recommendation: consider setting individual capital ratios based on bank risk profile and introduce a simplified ICAAP for rural, thrift and cooperative banks. - BSP does not directly vary individual banks’ capital requirements to reflect risk profile. - Credit risk, problem assets, provisions and reserves (CP 17–18) - Recommendation: develop a center of technical credit risk expertise within BSP to keep pace with increasingly sophisticated credit products and facilities. - BSP should develop guidance on expectations for banks’ management of internal credit risk models and contemplate horizontal deep-dive credit reviews, especially across D-SIBs. - BSP guidance on asset classification and provisioning is generally aligned with IFRS 9, but BSP should reassess adequacy of guidance pertaining to expected loss provisioning once SEC guidance is released. - BSP needs to update provisioning requirements for less sophisticated banks to ensure collateral valuation write-off requirements align with PFRS 9. - Risk management (CP 19–25) - Contingency planning aspects need addressing. - As BSP moves toward bank-by-bank minimum prudential capital and liquidity standards, it is critical to: - Update ICAAP guidance. - Introduce an ILAAP. - Separate D-SIB recovery plans from ICAAP for dedicated cross-D-SIB assessments. - Share D-SIB recovery plans with the resolution authority to ensure preparedness to deal with a major bank failure. *Source: 1phlea2020003 (IMF).* ### 44. BSP does not impose a single borrower limit on banks at a consolidated level. ### 1phlea2020003 - 44. BSP does not impose a single borrower limit on banks at a consolidated level. ### Large exposures and single-borrower limits - "BSP does not impose a single borrower limit on banks at a consolidated level." - Assessors note that BSP is currently working on the update of its large exposure guideline that will: - include the tracking of single borrower and aggregate large exposures on both a solo and consolidated basis; - expand the definition of interdependence, among other things. - The large exposure limits for banks, especially banking groups with a conglomerate group structure, is essential in BSP’s ability to effectively supervise and assess the level of interconnectedness risk impacting the bank. ### Liquidity and funding framework - "An appropriate regulatory framework is in place to ensure banks comply with minimum requirements for liquidity and funding." - BSP has introduced the LCR and NSFR frameworks for the D-SIBs and other major banks and has a simplified liquidity regime for smaller banks. - Identified weaknesses and considerations: - There are weaknesses in the monitoring tools for the LCR, which should be reviewed and aligned more closely with applicable Basel standards. - Consideration should be given to introducing an ILAAP framework to enable the BSP to set individual minimum liquidity and funding requirements for the major banks. - A monitoring regime for intraday liquidity has recently been introduced. ### Market risk and IRRBB supervision - "The regulatory framework and supervisory practice for market risk and interest rate risk in the banking book (IRRBB) are appropriate given the level of complexity of the risks being run by banks." - BSP is resourced in terms of both numbers and levels of expertise to supervise banks’ market risk functions effectively. - "There are proposals in hand to update both the market risk and IRRBB frameworks.10 When in place, both regimes will be better aligned to applicable Basel standards." ### Disclosures and transparency - "The BSP prescribes detailed public disclosure requirements for banks on both a consolidated and solo basis and verifies that these requirements are met." - Limitations of the current disclosure regime: - "The disclosure regime is not as comprehensive as the current BCBS Pillar 3 framework in terms of the scope and detail of coverage required across a number of risk elements (e.g., for NSFR, market risk, IRRBB and remuneration)." - "The current disclosure regime is in the process of being revised to align it more closely to the Basel Pillar 3 regime." - "Banks’ financial reporting requirements are in accordance with international standards." ### Abuse of financial services (AML/CFT) - "Although BSP’s supervisory oversight of bank’s compliance with AML/CFT requirements remains strong, certain components of the regulatory framework need to be strengthened." - Observations and recommendations: - BSP has made a concerted effort to effectively utilize its contingent of AML experts, however, it must ensure adequate resources are available to cover all banking institutions and other entities (e.g., MSBs) under its mandate. - Although BSP makes use of its enforcement tools (issuing directives, letters of commitment, etc.), it needs to ensure it is effectively utilizing its monetary penalty regime for AML/CFT non-compliance issues on a consistent basis. ### Detailed assessment context, methodology, and scope - "This assessment is based on the current state of the implementation of the Basel Core Principles for Effective Banking Supervision (BCP) in the Philippines." - The BCP assessment mission took place "from June 19 to July 9, 2019." - "Regulatory initiatives after the assessment date have not been taken into account." - Methodology and comparability: - "The methodology issued by the Basel Committee on Banking Supervision (BCBS) September 2012 was used for the current assessment and the authorities have opted to be assessed and graded on the essential criteria (EC) only." - "The 2002 BCP assessment, prepared in the context of the 2002 FSAP, as well as the focused follow-up report prepared in 2010 was based on the previous methodology." - "Since then, the methodology has been revised leading to some substantive changes." - "The 2012 methodology reflects lessons from the global financial crisis (GFC) and emerging supervisory best practices." - "Altogether, the revised Basel Core Principles (BCPs) now contain 247 separate essential and additional criteria against which a supervisory agency may be assessed." - Assessment process: - The assessment team reviewed laws, rules, and guidance and held extensive meetings with authorities and market participants. - The assessment team met officials of the BSP, the DOF, Bureau of the Treasury, PDIC, auditing firms, Board of Accountancy and SEC Oversight Assurance Committee and banking sector participants. - "The authorities provided a comprehensive self-assessment of the BCPs, as well as detailed responses to additional questionnaires, and facilitated access to staff and to supervisory documents and files on a confidential basis." - Proportionality and judgment: - The standards were evaluated "in the context of the sophistication and complexity of the financial system of the Philippines." - "An assessment of a country against the BCPs must, therefore, recognize that its supervisory practices should be commensurate with the complexity, interconnectedness, size, and risk profile and cross-border operation of the banks being supervised." - "The concept of proportionality underpins all assessment criteria." - "An assessment of one jurisdiction will not be directly comparable to that of another." - "An assessment of compliance with the BCPs is not, and is not intended to be, an exact science. Reaching conclusions required judgments by the assessment team." *Source: 1phlea2020003 - 44. BSP does not impose a single borrower limit on banks at a consolidated level.* ### 55. The team appreciated the very high quality of cooperation received from the ### 1phlea2020003 - 55. The team appreciated the very high quality of cooperation received from the ### Cooperation and acknowledgements - The team appreciated the very high quality of cooperation received from the authorities. - The team extends its warm thanks to staff of the authorities, who provided excellent cooperation, including provision of documentation and technical support. ### Principle 1 — Responsibilities, objectives and powers (overview) - Principle summary: An effective system of banking supervision has clear responsibilities and objectives for each authority involved in the supervision of banks and banking groups. /1 /2 - Primary supervisory authorities identified: Bangko Sentral ng Pilipinas (BSP) and Philippine Deposit Insurance Corporation (PDIC). - Memorandum of Arrangement (MOA) between BSP and PDIC sets out responsibilities but has not been disclosed publicly. ### Findings related to EC1 (definition, disclosure, coordination) - BSP is the primary banking supervisory authority; PDIC has supervisory and enforcement roles under law. - Constitutional and statutory basis: - BSP established under Article XII, S. 20 of the 1987 Constitution. - S. 3 of Republic Act (RA) No. 7653 (New Central Bank Act), as amended by RA No. 11211, gives BSP power to supervise banks and quasi-banking operations as mandated by the Monetary Board (MB). - Quasi-banks defined as entities engaged in borrowing through issuance/endorsement/assignment with recourse or acceptance of deposit substitutes for relending and purchasing receivables and other obligations. - S. 3 of the NCBA requires BSP to promote financial stability. - PDIC mandate under RA No. 3591, as amended: power to conduct joint examinations with prior BSP agreement and to appoint independent experts (RA No. 9302); enforcement powers where examination identifies unsafe or unsound practices. - PDIC may institute corrective action if MB does not act within forty-five days; period reduced to fifteen days if the practice is likely to cause insolvency or substantial dissipation of assets or earnings. - In practice PDIC lacks resources to undertake examinations alone and is unlikely to undertake its own enforcement action. - The MOA between BSP and PDIC: - Covers coordination, cooperation and data sharing; notification of planned examinations; joint examinations; harmonization of procedures and reports. - Has not been made public; contents described as not of a confidential nature. - Recommendation: MOA should be made public to provide greater transparency around responsibilities. - Cooperative enterprises licensed by Cooperative Development Agency (CDA); prior BSP approval required to become banks. - BSP supervises all co-operative banks, but no formal coordination or data sharing arrangement exists between BSP and CDA. ### Findings related to EC2 (primary supervisory objective) - Prevailing legislation does not explicitly state promotion of safety and soundness as BSP’s primary objective. - S. 4 of the General Banking Law of 2000 (GBL) sets out BSP supervisory functions intended to promote safety and soundness, including: - issuance of rules of conduct or establishment of standards; - conduct of examinations as determined by the MB; - overseeing compliance with laws and regulations; - regular investigation (not more often than once a year from last examination) to determine whether an institution is conducting business on a safe or sound basis; - inquire into solvency and liquidity of the institution; - enforcing prompt corrective action. - BSP has separate objectives to promote financial and price stability; these do not conflict with banking supervisory role. ### Findings related to EC3–EC5 (prudential standards, updates, access powers) - EC3 (prudential powers): - S. 108 of the NCBA provides BSP power to prescribe minimum capital ratios and to vary individual banks’ capital ratios commensurate to risk profile; BSP has not varied individual ratios to date. - BSP has raised risk weighting of certain higher risk assets and applied higher minimum capital ratios for D-SIBs (examples: Circulars Nos. 468 and 469). - EC4 (updating laws/regulations and consultation): - BSP updates supervisory legislation and regulations regularly; core Basel III elements introduced in past three years (capital definition amendments; higher capital minima; Liquidity Coverage Ratio (LCR); leverage ratio; framework for D-SIBs). - Numerous guidelines introduced (operational risk management and outsourcing; related party transactions; internal control and internal audit; BSP supervisory enforcement policy; sound credit risk management and IT risk management; definition of past due and nonperforming loans). - All changes subject to public consultation with industry. The formal consultation period requirement of 10 working days appears short, but BSP conducts extensive consultation during development; requests for additional time are common and agreed. - EC5 (access to banks’ boards, management, staff, records): - S. 3 and S. 4 of the GBL grant BSP power to conduct examinations; S. 25 of the NCBA compels presentation of books/documents to ascertain true condition of any bank. - Bank secrecy laws constrain access: S. 2 of RA No. 1405 (Law on Secrecy of Bank Deposits) and S. 8 of RA No. 6426 (Foreign Currency Deposit Act) treat deposits as absolutely confidential with limited exceptions (depositor consent; AMLC examinations under specified conditions or court orders). - Section 8 of RA No. 3591 provides PDIC may inquire/examine deposit accounts where unsafe or unsound practices found, but the secrecy laws hinder effective supervision (e.g., identifying funding concentrations, intra-group dependencies, cash flow analysis, related party transactions and off-site AML data and analysis). - Recommendation: BSP should be granted unimpaired access to depositor information and ability to employ and share depositor information for prudential purposes. - Legislative developments: a number of bills filed proposing amendments/repeal of secrecy laws; if passed would remove hindrances. ### Findings related to EC6–EC7 (enforcement powers; group-wide review) - EC6 (corrective action, sanctions, resolution cooperation): - Circular No. 875 (BSP’s Supervisory Enforcement Policy) sets out three categories of supervisory action: i) Corrective Actions (e.g., BSP Directives; Letter of Commitment (LOC)); ii) Sanctions (subject to prior MB approval), including on banks: Restrictions on activities and privileges; Suspension of authorities and other activities; Divestment and/or unwinding; Fines. On directors/officers: Reprimand; Restriction on Compensation and Benefits; Divestment; Suspension; Disqualification; Removal; Monetary Penalties/Fines. iii) Other Supervisory Actions (subject to prior MB approval): Initiation into the PCA Framework; Issuance of a cease and desist order (CDO) against bank and directors/officers; Conservatorship; Placement under Receivership. - See BCP 11 for details (referenced in source). - EC7 (powers to review parent and affiliates): - BSP does not have the power to regulate parent company or other affiliate companies of supervised institutions. - RA No. 1121 provides BSP new authority to obtain data from any person or entity for ‘statistical and policy development purposes in relation to the proper discharge of its functions and responsibilities’ — permits obtaining data from parent and affiliates but has not been used to date and is limited in scope. - Recommendation: BSP should have legal authority to review activities of parent companies and affiliates to determine their impact on safety and soundness of bank and banking group. - Practical supervisory practice: BSP must determine impacts of non-regulated parent/affiliate entities in conglomerate structures (important for D-SIBs); this issue covered in BCP 12 (EC1). ### Assessment, key weaknesses and quantitative staffing/resources - Assessment of Principle 1: Materially Non-Compliant. - Key weaknesses identified: - Bank secrecy laws constrain BSP’s ability to conduct effective ongoing supervision and access depositor information for prudential purposes. - BSP lacks full power to review and examine parent or affiliate companies; RA No. 1121’s data authority is limited and unused to date. - Current legislation does not clearly delineate responsibilities and objectives between BSP and PDIC; MOA exists but is not public. - No formalized coordination and data-sharing agreement between BSP and CDA. - Recommendations (exact text preserved): - Amend the bank secrecy laws to grant BSP full access to banks’ deposit and other data; - Provide BSP with the legal authority to review the activities of a bank’s parent companies and of companies affiliated with parent companies’ activities to determine their impact on the safety and soundness of the bank and the banking group; - Make the MOA between the BSP and PDIC public to provide greater transparency around the responsibilities of the two authorities; and - Establish a bilateral agreement between the BSP and CDA to formalize co-ordination and data-sharing arrangements between the two authorities. ### Principle 2 — Independence, accountability, resourcing and legal protection (highlights) - Principle summary: Supervisor possesses operational independence, transparent processes, sound governance, budgetary processes that do not undermine autonomy and adequate resources; legal protection for supervisor included. - EC1 (operational independence and governance): - Independence prescribed in law: S.20, Article XII of the 1987 Constitution; S.1 of RA No. 7653 provides central monetary authority shall function and operate as an independent and accountable body corporate. - Concern: S. 6 of the NCBA specifies MB composition includes a Cabinet member (has one vote); presence of senior political appointee raises concern regarding potential compromise of operational independence; NCBA does not specify role/responsibility of Cabinet member. - Accountability: Governor and executive members required to report to Congress when requested; S. 39 and 40 of NCBA specify publication timelines and scope of formal reports to President and Congress. - Supervisory actions may be challenged in court via judicial review on basis of unlawfulness. - EC2 (appointment and removal of MB members): - S. 6 of NCBA: MB composed of seven members appointed by the President for a term of six years; no member may be reappointed more than once. - MB composition: (a) Governor (Chairman, full time); (b) a Cabinet member; (c) five members of the private sector (full time). - Secretary of the Department of Finance (DOF) currently the Cabinet member designated to represent the Government in the MB. - S. 8, 9 and 10 set out qualifications, disqualifications and grounds for removal. S. 10 allows President to remove a member if physically or mentally incapacitated for more than six months. - No member has been dismissed by a President to date; recommendation to incorporate obligation to disclose publicly reasons for dismissal. - EC3 (publication of objectives and accountability framework): - BSP issues annual report with key regulatory and supervisory developments and commentary; BSP issues annual Financial Stability Report and other reports. S. 39 and 40 specify scope and publication timelines. - EC4 (internal governance and delegation): - S. 17 of NCBA specifies Governor’s powers and duties, including delegation authority; Office Order No. 57 gives effect to delegation. - Delegated approval and signing authorities set to ensure supervisory decisions taken at appropriate seniority. - MB structured to avoid conflicts of interest; private sector members disqualified from various roles with supervised institutions; restrictions on post- and pre-appointment affiliations. - EC5 (staff professionalism, ethics, conflict rules): - BSP has extensive training program; BSP Institute (BSPI) training framework with four categories (Entry, Intermediate, Advanced, Expert). - Training courses developed in-house with IMF technical assistance and linked to BIS Financial Stability Institute Connect learning program. - Current staffing described by industry contacts as suitably qualified and providing effective challenge. - Integrity measures: RA No. 6713 (Code of Conduct and Ethical Standards) obligations; Code of Ethics under Office Order Nos. 2014-484 to 486; S. 27 of NCBA prohibits BSP staff from being officers/directors/etc. of supervised institutions and restricts gifts, borrowing and disclosure of confidential information. - EC6 (resources and financing): - Organizational structure: Financial Supervision Sub-sectors I, II and III (FSSS) with nine (9) supervisory Departments in three sub-sectors. - Post-January 2019 restructuring: eight (8) departments responsible for supervision of a mix of universal, commercial and smaller banks; on-site and off-site supervision conducted by each team; separate Policy and Specialized Supervision Sub-sector assesses market, IRRBB, liquidity, operational and counterparty credit risks. - Current staffing complement of front-line supervisors in FSSS is 682. - BSP financed solely from income generated from its own operations; not dependent on Congress for financial support — provides operational independence and flexibility for recruitment and remuneration. - Specific resource points: - (a) Annual budget process considers adequacy of staffing for subsequent financial year; - (b) Recruitment salaries and overall package are very competitive; turnover levels are low; - (c) S. 58 of the GBL provides BSP power to commission external experts; budgetary resources available and have been used in the past; - (d) Training program and budget referenced in EC7; - (e) BSP has ambitious IT program (e.g., R2A and a new Financial Institution portal) with adequate funds for development; - (f) Annual travel budgets accommodate international supervisory commitments and training. - EC7 (annual resource planning and skills development): - BSP undertakes comprehensive annual budget process reviewing adequacy of staffing quantity and quality. - Comprehensive training program directed by BSPI with four-category training framework. *PHILIPPINES — INTERNATIONAL MONETARY FUND (excerpt).* ### 1. Entry—Courses A to C designed for new employees, including those with professional ### 1. Entry—Courses A to C designed for new employees, including those with professional designations such as certified public accountants ### Course levels and target audiences - Entry - Courses A to C designed for new employees, including those with professional designations such as certified public accountants. - The course covers (i) basic economic concepts, (ii) the business of banking, (iii) purposes and functions of the central bank, and (iv) organization and function of the sector; - Intermediate - Courses D to H are designed for examination professional employees with previous experience in the financial services sector; - Advanced - Courses I to L signal the completion of the standard training program for most examination professionals; *Source: 1phlea2020003 - 1. Entry—Courses A to C designed for new employees, including those with professional designations such as certified public accountants.* ### 4. Expert—Courses M to P are designed for employees whose technical and behavioral skill ### 1phlea2020003 - 4. Expert—Courses M to P are designed for employees whose technical and behavioral skill ### Expert level description - Courses M to P are designed for employees whose technical and behavioral skill sets have been recognized by management to be complete in all material respects. - Courses at this level are designed to advance unique skill sets beyond those of the rank-and-file examiner, analyst or manager. - See BCP17 and BCP22 EC1 respectively for commentaries on credit and market risk expertise in the BSP. ### EC8 — Risk-based supervisory programmes and resource allocation: description and findings - The BSP aims to adopt a risk-based approach to supervision, applying greater resources to those banks which pose the greatest risk, but all banks, including the smallest, are currently subject to annual examination. This model is in the process of being amended. See BCP 8. - The BSP is introducing a supervisory model which will vary the timing of bank examinations according to the risk profile and systemic importance of the bank. - The supervisory division was restructured in early 2019 to combine on-site and off-site teams to facilitate the move to a more risk-based approach to bank examinations and to enhance its approach to consolidated supervision. ### EC9 — Legal protection/indemnity for supervisors: description and findings - S. 15 (e) of the NCBA, as amended, indemnifies all BSP staff against all costs and expenses reasonably incurred in connection with any civil or criminal action, suit or proceedings to which (s)he may be, or is, made a party by reason of the performance of his/her functions or duties, unless (s)he is finally adjudged in such action or proceeding to be liable for negligence or misconduct. - The legal protection under Section 15 (e) of the NCBA, as amended, continues even after the officer/employee has already left the BSP, provided that the suit was filed in connection with the performance of official functions. - BSP Office Order No. 212, Series of 1997 provides that the right to indemnification shall apply even if the BSP official or personnel has retired or resigned from the BSP. - Under the guidelines, the right to indemnity is also applicable even if the case was filed after the retirement or resignation of the BSP official or personnel. ### Assessment of Principle 2 and recommendations - Assessment: Largely Compliant - Comments: - The BSP has full discretion to take any supervisory actions or decisions on banks and banking groups under its supervision and is adequately resourced to carry out those duties. - Although there is no evidence of any past political interference in supervisory decisions taken by the MB, the operational independence of the BSP is compromised by the attendance of a member of the Cabinet on the MB. - Recommendations: - Amend the Charter of the BSP to revisit the position of the Cabinet Member as a voting member of the MB; - Amend the NCBA to require public disclosure of the reason(s) for dismissal of the Head of the MB. --- ### Principle 3 — Cooperation and collaboration: framework and findings - Principle statement: Laws, regulations or other arrangements provide a framework for cooperation and collaboration with relevant domestic authorities and foreign supervisors. These arrangements reflect the need to protect confidential information. #### EC1 — Domestic cooperation: description and findings - S. 3 of RA No. 7653, as amended by RA No. 11211, mandates the BSP to promote and maintain financial stability by working closely with authorities including the DOF, the Securities and Exchange Commission (SEC), the Insurance Commission (IC) and the Philippine Deposit Insurance Corporation (PDIC). - Two bodies established to promote coordination and information sharing: - Financial Stability Coordination Council (FSCC), established in January 2014, comprises representatives of the BSP, SEC, the IC, the PDIC, and the DOF; mandated to identify, manage, prevent or address external and internal shocks and pressures on the Philippine financial system. - Financial Sector Forum (FSF), established in July 2004 by the heads of the BSP, SEC, IC and the PDIC to provide an institutional framework for coordinating the supervision and regulation of the financial system; meets formally every two months; multilateral MOAs signed by FSF Member Agencies to provide for the exchange and sharing of relevant reports, information and data. - BSP bilateral MOAs: - SEC MOA: outlines arrangements to share information on entities under both agencies’ jurisdiction; provides for consultation and for joint examinations of NBFIs (no joint examinations undertaken to date). - PDIC MOA: framework for joint or independent on-site examinations and to share/exchange relevant reports, significant information and preliminary findings on individual banks. - IC MOA: provides BSP authority to examine an insurance company which is a subsidiary or affiliate of a regulated bank and to share reports and information. - Working group with CDA exists; recommendation that a formal MOA should be agreed between BSP and CDA. - Some banking groups are subject to more than two domestic supervisors; effective bilateral coordination exists, but no framework for BSP to convene colleges of supervisors domestically when multiple regulators are involved. - Recommendation that BSP consider establishing formal colleges of supervisors with the SEC, PDIC and IC as and when supervisory regimes in the SEC and IC are applicable. - Footnotes: - An amendment to the FSF multilateral MOA on Information Exchange was signed in February 2020. - A MOA establishing college arrangements to share information between domestic regulators was signed in February 2020. #### EC2 — Cooperation with foreign supervisors: description and findings - Guidelines for exchange of information between BSP and relevant foreign supervisory bodies agreed by the MB in July 2004; provide for home supervisory counterparts to access BSP examination reports and other information of foreign-based banks in the Philippines without prior approval of the MB. - BSP has formal MOU and informal information sharing arrangements with jurisdictions including the United Kingdom, Taiwan Province of China, China, Hong Kong, SAR, and Thailand. - BSP is a signatory to the Multilateral MOU between Members of the Australia and New Zealand Banking Group Supervisory College. - BSP in technical discussions with US counterparts for a possible MOU on home-host supervisory coordination. - The MOU with BaFin (Germany) is redundant because supervisory responsibility passed to the European Union’s Single Supervisory Mechanism (SSM); the MOU needs to be reviewed. - Evidence sighted of effective bilateral communication between BSP and foreign regulators. #### EC3 — Protection of confidential information when providing it: description and findings - MOUs with domestic and foreign regulators provide that confidential information passed by the BSP must be treated as confidential by the receiving party. #### EC4 — Use and non-disclosure of confidential information received: description and findings - MOUs with domestic and foreign regulators provide that confidential information passed to the BSP be used only for supervisory purposes and not to be disclosed to third parties without consent. - BSP has not been asked to disclose confidential information provided to it by another regulatory body. #### EC5 — Support for recovery and resolution planning: description and findings - BSP has a MOA with the PDIC setting out coordination and cooperation arrangements; PDIC is the principal Resolution Authority in the Philippines. - There is no formal process in place to effect an orderly resolution of a bank in the Philippines, although there is evidence of effective bilateral coordination on a troubled bank with the PDIC. - BSP is not party to Crisis Management Groups (CMG) established by foreign banks with significant branches in the Philippines, three of which are D-SIBs, on the grounds that the Philippine operations are not material to the overall size of those foreign banking groups. - BSP requires branches to hold local capital and comply with local prudential regulatory requirements to mitigate financial stability risk. ### Assessment of Principle 3 and recommendations - Assessment: Compliant - Comments: Existing regulations and practical arrangements between the BSP and domestic and foreign regulators provide an effective framework for cooperation and collaboration. The MOAs signed between the respective regulators adequately reflect the need to protect confidential information. - Recommendations: - Negotiate a MOA with the SSM to replace the existing MOA with BaFin. - Negotiate a formal MOA between the BSP and CDA. - Establish formal college of supervisor arrangements for sharing information between domestic supervisory bodies. --- ### Principle 4 — Permissible activities: definition, naming controls, and deposit-taking #### EC1 — Definition of “bank”: description and findings - The term “bank” is defined in S.3.1 of the GBL or the RA No. 8791 as “entities engaged in the lending of funds obtained in the form of deposits.” - S. 3.2 of the GBL classifies banks into: - “(a) Universal banks; - (b) Commercial banks; - (c) Thrift banks, composed of: (i) Savings and mortgage banks, (ii) Stock savings and loan associations, and (iii) Private development banks, as defined in RA No. 7906 (hereafter the "Thrift Banks Act"); - (d) Rural banks, as defined in RA No. 7353 (hereafter the "Rural Banks Act"); - (e) Cooperative banks, as defined in RA No. 6938 (hereafter the "Cooperative Code"); - (f) Islamic banks as defined in RA No. 6848, otherwise known as the "Charter of Al Amanah Islamic Investment Bank of the Philippines"; and, - (g) Other classifications of banks as determined by the MB of the BSP.” - Definition of “quasi-bank” (QB) in the GBL: “… entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes for purposes of relending or purchasing of receivables and other obligations. (“deposit substitutes” are defined in S. 95 of the NCBA as non-deposit instruments such as bankers’ acceptances, promissory notes and repurchase agreements).” - The BSP does not charter QBs as independent entities; rather banks are permitted to engage in quasi-banking activities. #### EC2 — Permissible activities defined: description and findings - GBL Annotated (Book II) provides the two basic functions of banks: (i) acceptance of deposits from the public; and (ii) lending of funds obtained from deposits. - Permissible activities for categories of banks are set out in various sections of the GBL (Articles I and II of Chapter IV and S. 53) and other special banking laws (Thrift Banks Act, Rural Banks Act, Cooperative Code, Charter of Al-Amanah). - S. 101 of the Manual of Regulation for Banks (MORB) elaborates permissible activities and powers of universal, commercial, thrift, rural and cooperative banks. - Scope of quasi-banking activities defined in the MORB (S. 241-246). - Authority to engage in securities, insurance, real estate and non-financial activities: - Only universal banks are allowed to directly (or indirectly through its subsidiary) engage in securities underwriting, brokering and dealing (S. 101 of the MORB); - With prior BSP approval, banks may invest in equities of financial allied undertakings, subject to limits (S. 372 and S. 373 of the MORB); - Only universal banks are allowed to cross-sell group financial products, which include insurance products (S. 113 of the MORB), but are not permitted to directly underwrite insurance; - Only universal banks may indirectly engage in insurance underwriting and selling through its subsidiary (S. 372 of the MORB); - If the real estate is a non-financial allied undertaking: a bank (directly or through a subsidiary) may acquire up to 100% of the equity of a non-financial allied undertaking, except for thrift/rural bank which shall be limited to less than 50% of the voting shares in that enterprise. Prior MB approval is required if the investment is in excess of 40% of the total voting stock of such allied undertaking (S. 375 of the MORB); - If the real estate is a non-allied undertaking: only universal banks (directly or through a subsidiary) may invest in the equity of an enterprise engaged in non-allied or non-related activities, subject to limits (S. 376-A of the MORB). - The BSP does not supervise non-bank parent companies of banks nor of allied affiliates; BSP does not define or restrict permissible activities of a wider group or conglomerate that owns or incorporates a licensed bank. #### EC3 — Use of the word “bank” in names: description and findings - S. 6 of the GBL provides that no person or entity shall engage in banking operations or quasi-banking functions without authority from the BSP. - S. 64 of the GBL prohibits unauthorized use of the words "bank", "banking", "banker", "quasi-bank", "quasi-banking", "quasi-banker", "savings and loan association", "trust corporation", "trust company" or words of similar import. - S. 102 of the MORB provides business name guidelines for universal/commercial banks, thrift banks, rural banks/cooperative banks, and conditions for exemption subject to prior BSP approval. - Conditions for name-change exemption include reasonable description of activities, non-misleading name, compliance with minimum capitalization, absence of major supervisory concerns, and other BSP-determined conditions. - S. 102 of the MORB provides rules governing bank advertisements, including prohibitions on misleading or false claims and responsibilities of bank officers/directors for compliance. #### EC4 — Reservation of deposit-taking to licensed institutions: description and findings - The term “bank” is defined in S. 3.1 of the GBL as “entities engaged in the lending of funds obtained in the form of deposits.” - GBL Annotated Book II defines deposit as funds placed with a bank in a savings account, or in demand account subject to withdrawal by check. - S. 29 and S. 33 of the GBL and S. 201 of the MORB set out authority and conditions for acceptance or creation of demand deposits by various bank categories. - Institutions authorized to accept deposits besides universal and commercial banks: - Non-stock savings and loan associations (NSSLAs): may accept deposits only from members and regulated by BSP (Manual of Regulations for Non-Bank Financial Institutions, N Regulations). - Cooperatives: a cooperative bank may accept deposits only from its members and are under supervision of the Cooperative Development Authority (RA 9520). #### EC5 — Publication of list of licensed banks: description and findings - A list of licensed banks and branches of foreign banks operating within BSP’s jurisdiction is published at the BSP website; the listing contains name and contact information, including website if available. - The list is updated whenever there are changes in status (change of name, merger or acquisition, closure) through Circular Letters available on the BSP website. - A list of BSP-supervised financial institutions with approved special authorities (additional derivatives, trust authority, e-money issuers) is posted on the BSP website. ### Assessment of Principle 4 - Assessment: Compliant - Comments: BSP laws and regulations clearly establish permissible activities of supervised banks, and naming conventions are controlled. Taking of deposits is restricted to identified BSP authorized institutions. A list of licensed banks is publicly available. --- ### Principle 5 — Licensing criteria: authority, criteria, and assessment #### EC1 — Licensing authority and withdrawal power: description and findings - S. 6 of RA No. 8791 (GBL) provides BSP the authority to grant or withdraw banking licenses: “No person or entity shall engage in banking operations or quasi-banking functions without authority from the BSP: Provided, however, that an entity authorized by the BSP to perform universal or commercial banking functions shall likewise have the authority to engage in quasi-banking functions. ...” - SEC registers articles of incorporation and by-laws of any bank upon issuance by the BSP of the Certificate of Authority to Register. Local government entities issue business permits before a bank can commence operations. Certificate of Authority to Operate issued after requirements are completed. - Circular No. 902: authority to establish a bank revoked automatically if not organized and opened for business within one year after receipt of notice of approval by the MB. - S. 30 of the NCBA: MB may summarily and without prior hearing forbid the institution from doing business and appoint PDIC as receiver if MB finds the bank/quasi-bank: - a. is unable to pay its liabilities as they become due in the ordinary course of business; - b. has insufficient realizable assets, as determined by the BSP, to meet its liabilities; or - c. cannot continue in business without involving probable losses to its depositors or creditors; or - d. has willfully violated a cease and desist order under S. 37 that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution. - Circular No. 947: BSP reserves the right to withdraw or revoke licenses/authorities when institution no longer meets criteria or standards. - Local government permits/taxes: Local Government Code allows LGUs to impose taxes and fees; non-payment may result in non-granting of business permits which could render bank operations illegal despite bank license. - S. 28-A of the NCBA amendments: “suspension or revocation of any government license necessary for the operation of a regulated bank must be done only with prior consultation with the BSP.” Amendment does not set time frame for prior notice and does not require prior approval of the BSP. #### EC2 — Power to set licensing criteria and reject applications: description and findings - S. 8 of the GBL: MB may authorize organization of a bank or QB subject to relevant conditions. BSP can reject application if information provided is inadequate. - No explicit provision in GBL or implementing regulations authorizing revocation of a banking license if application was based on false information. Reasonable to infer such authority exists under BSP’s general grant of authority, though explicit regulatory expression would provide clarity. #### EC3 — Consistency of licensing criteria with ongoing supervision: description and findings - S. 8 of the GBL requires MB to consider capability in financial resources, technical expertise and integrity; bank licensing process shall incorporate assessment of ownership, directors and senior management, operating plan, internal controls and projected financial condition and capital base. - Circular No. 902: new domestic banks should have suitable/fit shareholders, adequate financial strength, appropriate legal structure, and management with sufficient expertise and integrity; applicants must submit evidence of financial capacity, corporate plan and feasibility study with projections. - S. 2 of “An Act Allowing the Full Entry of Foreign Banks in The Philippines” sets standards for foreign bank entry approvals including geographic representation, strategic trade relationships, demonstrated capacity, global reputation, reciprocity rights, and willingness to share technology; requires established, reputable and financially sound foreign banks that are widely owned and publicly-listed unless government-owned. - Circular No. 858: guidelines and criteria for approving establishment of new foreign banks and application documents. - Circular No. 947: prudential criteria for granting licenses/authorities; minimum conditions include no major supervisory concerns in governance, risk management and internal controls, and compliance with directives/enforcement actions. - Observation: Criteria across Circulars are consistent with ongoing supervision but are not co-extensive; recommend rationalizing criteria to ensure consistency across licensing. #### EC4 — Assessment of legal, managerial, operational and ownership structures for supervisory effectiveness: description and findings - BSP licensing regulations and standards require information regarding legal, managerial, operational and ownership structures of applicants and obtain information regarding the ‘wider group.’ - Ownership structure assessed via documents including conglomerate map/structure, corporate subscriber’s list of stockholders including ultimate beneficial owners. - Foreign bank applicants required to describe ownership and control structure, whether part of a financial or commercial conglomerate, and disclose related parties operating in the Philippines. #### EC5 — Suitability of major shareholders and transparency: description and findings - S. 8 of the GBL requires MB to consider capability in financial resources, technical expertise and integrity; licensing process shall incorporate assessment of ownership structure, directors and senior management, operating plan, internal controls, projected financial condition and capital base. - S. 102 of the MORB: new banking organization must have suitable/fit shareholders, adequate financial strength, appropriate legal structure and management with sufficient expertise and integrity. - Appendix 33 of the MORB — guidelines in evaluation of incorporators, subscribers, directors and officers: - (1) Incorporators, subscribers and proposed directors and officers must be persons of integrity and good credit standing; subscribers must have adequate financial strength to pay proposed subscriptions. - (2) Must not have been convicted of crimes involving moral turpitude; generally not to be officers or employees of government agencies charged with supervision or granting loans to banks. - (3) A bank may be organized with not less than five (5) nor more than fifteen (15) incorporators. - (4) Number and nationality of Board members subject to limits prescribed under S. 132 of the MORB. - (5) No appointive or elective public official shall at the same time serve as officer of a bank except in specified cases. - (6) Proposed directors and officers subject to qualifications under S. 132 and 137 of the MORB. - (7) Disqualifications under S. 138 of the MORB also apply. - S. 122 (d) of the MORB provides that newly established banks shall, before being allowed to operate, submit required documents (list continues beyond provided excerpt). --- *Italicized source: Extracted from the IMF report chapter text in the provided content unit.* ### 1. An alphabetical list of stockholders with the number and percentage of voting shares ### 1. An alphabetical list of stockholders with the number and percentage of voting shares ### Required submissions for new bank applications - An alphabetical list of stockholders with the number and percentage of voting shares of stock owned by them. - A separate list containing the names of stockholders who own voting shares of stock in the bank and who are related to each other within the fourth degree of consanguinity or affinity, whether legitimate, illegitimate or common-law (in the case of individuals) as well as corporations which are wholly-owned or a majority of the stock of which is owned by any of such stockholders, including their subsidiaries. - An affidavit under oath from each of the stockholders attesting, among other things, that he/she/it is the bona fide owner of the voting shares of stock of the bank in his/her/its own right, and not as an agent, assignee, proxy, nominee or a dummy of any other person, natural or juridical. - The applicant for a new bank must also submit evidence of financial capacity of each individual Filipino/non-Filipino incorporators/subscribers. ### Observations on current documentation and scope - Appendix 33 of the MORB requires the submission of a list of shareholders, including ultimate beneficial owners, but the suitability information required of incorporators and subscribers does not extend to ultimate beneficial owners. This omission would be material were a new bank to be established by a conglomerate group, although no such applications have been received in recent experience. - There is lack of clarity regarding the standard to be met in order to demonstrate adequate “financial strength” of incorporators and subscribers. Appendix 33 requires generally that incorporators and subscribers submit “evidence of financial capacity,” and, at a later point, requires that “subscribers must have adequate financial strength to pay for their proposed subscriptions in the bank.” - This wording could be interpreted to limit the review of financial strength to support the initial capital subscription and omit a requirement that incorporators or subscribers demonstrate financial capacity to provide additional support to the bank, if needed, beyond their initial subscription. - The additional capacity is especially material in relation to the license of rural banks, which are generally small, family-run operations which, as a group, have demonstrated financial fragility, with many having suffered capital deficiencies and an inability to restore the institution to minimum required capital levels, resulting in multiple closures. ### Minimum initial capital (EC6) - S. 8 of the GBL provides that the MB may authorize the organization of a bank provided that the minimum capital requirements prescribed by the MB for each category of banks are satisfied. - Circular No. 854 provides the new minimum capitalization of banks. The minimum capitalization shall be required upon: - (a) establishment of a new bank; - (b) conversion of an existing bank from a lower to a higher category bank and vice versa; and - (c) relocation of the head office of a thrift or rural bank in an area of higher classification. - Appendix 107 of the MORB provides that banks to be established must comply with the minimum capitalization of banks prescribed under S. 121 of the MORB. Further, the paid-up capital shall be no less than the minimum required capital. - S. 103 of the MORB states that a foreign bank subsidiary/branch shall comply with the minimum capital and prudential capital ratios applicable to domestic banks of the same category. - Under Circular 854, minimum initial capital requirements vary depending upon the type of bank and the number of branches. For Universal Banks and Commercial Banks, the minimum capitalization (no branches; head office only) is Php 3 Billion (approx. US$ 57.8 million) and Php 2 Billion (approx. US$ 38.5 million) respectively. ### Fit and proper assessment of board and senior management (EC7) - S. 8 of the GBL provides that the bank licensing process shall incorporate an assessment of a bank’s directors and senior management. - S. 102, Appendix 33 of the MORB provides the guidelines in the evaluation of incorporators, subscribers, directors and officers. - S. 132 of the MORB sets out minimum qualifications for directors, including “fit and proper” requirements and requires submission of documentary proof and certification to support BSP’s review and approval. The role and duties of the board of directors is elaborated in S. 132 of the MORB and the board’s governance and conduct are evaluated during the regular examination cycle. - The licensing authority determines whether the bank’s Board has collective sound knowledge of the material activities the bank intends to pursue, and the associated risks. - After approval of the new bank, members of the Board are required to attend a seminar on corporate governance, which should be in accordance with the BSP-prescribed syllabus on corporate governance for first time directors. ### Review of strategic, operational plans and controls (EC8) - S. 8 of the GBL provides that the bank licensing process shall incorporate an assessment of the bank's ownership structure, directors and senior management, its operating plan and internal controls as well as its projected financial condition and capital base. - Appendices 2 and 33 of the MORB require, among others, the submission of corporate plan and feasibility study. The corporate plan shall describe in meaningful details the business model and strategies of the bank. Moreover, the bank shall submit the chart of organization and its list of principal officers, compliance with minimum security measures as well as an undertaking that the manual of operations embodying the policies and operating procedures covering all risk areas of the proposed bank have been prepared. - BSP has issued Circulars that set forth standards addressing corporate governance expectations (including risk management and internal controls) (Circular No. 947), as well as standards on the management of contracts and outsourcing of banking functions (Circular No. 899). However: - These standards are not directly tied to the application process and do not mandate reviews of compliance with such standards prior to approval of the license—to ensure that appropriate systems and controls “will be in place.” - Similarly, while Anti-Money Laundering (AML) standards have been issued, appropriate elements have not been incorporated into the new bank licensing process to ensure that the applicant will have effective governance and controls related to the detection and prevention of criminal activities “in place.” ### Review of pro forma financial statements and shareholder financial strength (EC9) - S. 8 of the GBL provides that the bank licensing process shall incorporate an assessment of the bank's ownership structure, directors and senior management, its operating plan and internal controls as well as its projected financial condition and capital base. - Appendices 2 and 33 of the MORB require applications for foreign operations and new domestic bank applicants respectively, to submit among other items, the corporate plan and projected financial statements. - The applicant for a new bank must also submit evidence of financial capacity of each individual Filipino/non-Filipino incorporators/subscribers. - The strategic plan and projected financial statements of the applicant bank are reviewed by management of the BSP’s FSS. Staff analysis is incorporated in a memorandum submitted to the MB for approval. The applicant bank is expected to present its business model, corporate strategies and financial projections including the underlying assumptions. It should also demonstrate that it is financially sound and capable of conducting business in the Philippines in a safe and sound manner. ### Requirements for foreign bank applicants and home supervisor coordination (EC10) - Circular No. 858, Appendix 2 of the MORB requires the submission of a Certification from the foreign bank applicant’s home country supervisory authority that: 1. It has no objection to the foreign bank’s investment; 2. It will provide the BSP with relevant supervisory information, including derogatory information, related to the applicant bank, to the extent allowed under existing laws; 3. The foreign bank applicant is compliant with the capital requirements as prescribed by the laws and regulations of its country of origin. *Source: 1phlea2020003 - 1. An alphabetical list of stockholders with the number and percentage of voting shares* ### 4. Philippine banks may establish subsidiaries and/or branches in the foreign bank ### 4. Philippine banks may establish subsidiaries and/or branches in the foreign bank applicant’s home country, subject to compliance with the host country’s rules and regulations governing admission generally applicable to all foreign banks ### Licensing, market entry and monitoring of new entrants (EC11 / Principle 5) - Findings - Philippine banks may establish subsidiaries and/or branches in the foreign bank applicant’s home country, subject to host country rules and regulations. - During evaluation of a foreign bank’s application, BSP determines whether the counterpart supervisory authority in the home country has an existing cross-border MOU with the BSP. At present, BSP does not have in place a cross-border MOU with the United States, nor with the European Central Bank. - The Circular does not set forth an explicit requirement that BSP review and determine that the home supervisor “practices global consolidated supervision.” - BSP does not appear to have a defined framework to assess the adequacy of a home supervisor’s approach to consolidated supervision, although file reviews showed evidence of such checks. - After chartering, new banks are endorsed to the appropriate Financial Supervision Department (FSD) for continuing supervision; compliance with supervisory requirements/conditions for the approval of the license is handed off to the assigned FSD. - There are no separate guidelines or procedures mandating an on-site review at initiation of operations or more frequent review of newly licensed banks; such institutions may only be examined at the regularly scheduled examination. - Regularly scheduled examinations have been mandated to occur at least annually, but amendments to the BSP charter now allow greater flexibility (e.g., small or rural banks may be examined less frequently, once every three years). - With a movement towards less frequent regular examinations, a system to ensure prompt monitoring of new entrants is lacking. - Assessment of Principle 5 - Largely Compliant - Key comments - BSP has adequate authority to set criteria and reject banking license applications. - Licensing process involves assessments of ownership structure and governance and obtains prior consent of foreign authorities for licensing foreign banking organizations. - Licensing regulations and standards do not clearly identify grounds for revocation (especially when based upon false information), do not mandate a review of the suitability of ultimate beneficial owners, and do not consistently apply ongoing supervision standards (governance, internal controls and risk management) to ensure such are “in place” upon entry. - A system to ensure prompt monitoring of new entrants is lacking. - Recommendations - Clarify in regulations or supervisory guidance the grounds supporting revocation (beyond grounds supporting appointment of PDIC as receiver), including ability to revoke when applications are determined to be submitted based upon false information. - Amend licensing criteria to ensure a review of the suitability of ultimate beneficial owners, where applicable, and specify demonstration of financial strength of incorporators or subscribers adequate to provide additional financial support beyond the initial subscription level. - Amend licensing criteria to set objective criteria for licensing of new banks, foreign banks, and to grant licenses for additional authorities to apply standards consistent with ongoing supervision equally across applicants, including ensuring applicants have adequate and consistent governance, internal controls and risk management systems “in place” upon commencing operations. - Clarify licensing guidelines or procedures to mandate more frequent review of newly licensed banks upon entry into the banking system. - Ensure ongoing supervision incorporates a review of relevant banks’ compliance with applicable local tax, licensing or other supervisory requirements. - Continue close coordination with local government units to coordinate regarding licensing and permitting processes. ### Transfer of significant ownership (Principle 6) - Scope and legal provisions - S. 122 of the MORB provides the only definition pertaining to change of control of a financial institution and is subject to limitations; MORB S. 131, 362, and 371 are referenced by BSP but are not incorporated into S. 122. - Language of the NCBA amendments (S. 25-A) restricts BSP prior approval only to the transfer of “voting shares.” - EC1 (definitions) - Findings - S. 122 speaks only in terms of transfer of “ownership or control of the voting shares of a bank.” - The apparent restriction in S. 25-A to the transfer of voting shares, the lack of a clear definition of beneficial ownership, and lack of clarity in definition of “control” could restrict BSP’s ability to review and approve transfer of significant controlling interests indirectly held by ultimate beneficial owners. - EC2 (requirements for approval / notification) - Findings - New BSP Charter S. 25-A provides that transfers or acquisitions, or a series thereof, of at least 10 percent of the voting shares in banks or QBs shall require prior approval of the BSP. - Under existing regulations (S. 122 MORB), prior approval of the MB required for transactions that: (a) result in ownership or control of more than twenty percent (20 percent) of voting shares of stock of a bank, or (b) effect a change in majority ownership/control of voting shares from one group to another; such transactions must comply with minimum capital requirements for new banks. - BSP indicated review of existing regulations is taking place given NCBA changes reducing prior approval threshold from 20 percent to 10 percent of voting shares. - Disclosure of ultimate beneficial owners of shares held in the name of PCDNC is mandated in an annual (or quarterly whenever changes occur) report; this provides after-the-fact information only and does not provide immediate notification of proposed changes in beneficial ownership. - EC3 (power to reject/modify/reverse) - Findings - Laws and regulations provide clear authority to approve and reject proposals for changes in voting shares (S. 25-A, S. 122 MORB). - S. 25-A: “without BSP approval, no such transfer or acquisition (of 10 percent or more of voting shares) shall have legal effect nor shall the same be recognized in the books of the institution or by any government agency... Transfer of actual control or management... prior to BSP approval shall make the transferor, the transferee and any person responsible therefor liable under S. 36 and 37 of the Act.” - S. 122 declares certain transactions involving voting shares “unlawful and void” where prescribed ceilings are exceeded and requires accompanying documents equivalent to incorporators/stockholders of newly established banks. - BSP regulations place onus on Corporate Secretary to ensure information accuracy; Corporate Secretary subject to administrative sanctions; submission of false information may lead to criminal charges under S. 35 of the NCBA. - Regulations do not explicitly set forth power to reverse or modify approval when transfer was approved based on false information; BSP asserts inherent power to reverse or modify previously approved transfers as unlawful and void where based on false information. - EC4 (information on significant shareholders / beneficial owners) - Findings - S. 173 of the MORB requires banks to submit a complete list of stockholders and their stockholdings annually and quarterly when any change occurs within the reference quarter. - S. 122 mandates corporate secretary disclose ultimate beneficial owners of bank shares held in the name of PCDNC, including numbered, trust and custodial accounts, in annual (or quarterly when changes occur) Consolidated List of Stockholders and Their Stockholdings. - Appropriate supervising departments have conducted activities to verify compliance with disclosure requirements for beneficial owners under PCDNC. - EC5 (power to address unauthorized change of control) - Findings - S. 25-A provides that transfers or acquisitions of at least 10 percent of the voting shares require prior approval; transfers without approval have no legal effect and parties involved may be liable under S. 36 and 37. - S. 122 mandates corporate secretary hold registration of transaction in abeyance until MB approval and funds infused by new subscriber are held in escrow until approval. - Failure to secure required MB approval renders parties subject to criminal and administrative sanctions under S. 35 and 37 of the NCBA; provisions effectively prevent transfers of voting shares in excess of prescribed limits without MB approval. - EC6 (notification of material negative information) - Findings - BSP laws, regulations or supervisory requirements do not explicitly require notification to BSP of material negative information affecting suitability of major shareholders or parties with controlling interests. - Reporting requirements to identify ultimate beneficial owners do not include submission of information that may affect suitability of parties that have controlling interests. - Assessment of Principle 6 - Materially Non-Compliant - Key comments - NCBA S. 25-A could restrict BSP’s authority to pre-approve transfers of ownership to transactions involving transfers of voting shares; prior approval authority does not extend to ownership of significant controlling interests held indirectly. - Existing regulations lack clarity in definition of “control” or “significant controlling interest,” do not define beneficial ownership, and are tied to voting shares. - BSP lacks explicit requirement to be notified of material negative information affecting suitability of direct or indirect controllers. - Given conglomerate ownership and cascading ownership chains to ultimate beneficial owners for multiple significant D-SIBs, these deficiencies could impair BSP’s ability to review and approve transfers of significant controlling interests and assess suitability of ultimate beneficial owners. - Recommendations - Review and amend the legal and regulatory framework related to transfer of significant controlling interests to include definition of ultimate beneficial owner or direct and indirect significant controlling interest. - Ensure BSP has the power to review, reject and impose prudential conditions upon transfer of controlling interest or significant ownership, including beneficial ownership, held directly or indirectly. - Ensure BSP has the power to review and enforce suitability of beneficial owners and obtain timely information regarding material changes to their suitability. ### Major acquisitions and investments by banks (Principle 7) - EC1 (definitions of what needs prior approval) - Laws and limits - S. 24 of the GBL: universal bank may “invest in the equities of allied and non-allied enterprises as may be determined by the MB.” - Limits in relation to net worth: - 24.1. The total investment in equities of allied and non-allied enterprises shall not exceed fifty percent (50 percent) of the net worth of the bank. - 24.2. The equity investment in any one enterprise, whether allied or non-allied, shall not exceed twenty-five percent (25 percent) of the net worth of the bank. - S. 30 for commercial banks: - 30.1. The total investment in equities of allied enterprises shall not exceed thirty-five percent (35 percent) of the net worth of the bank. - 30.2. The equity investment in any one enterprise shall not exceed twenty-five percent (25 percent) of the net worth of the bank. - Acquisition of equity or equities subject to prior approval of the MB. - Investments requiring prior supervisory approval include: - (a) All investments in allied or non-allied undertakings including corporate affiliations or structures as stated in S. 371 of the MORB; - (b) All investments in equities of financial allied undertakings as specified in S. 372 of the MORB; - (c) Equity investments in excess of forty percent (40%) of the total voting stock of a non-financial allied undertaking as defined in S. 375 of the MORB; - (d) Equity investments directly or through subsidiaries in non-allied enterprises except categories listed in S. 376-A of the MORB; - (e) Establishment or acquisition of subsidiaries or affiliates abroad, in accordance with S. 377 of the MORB. - Notification after the fact (within 30 banking days after the investment) is sufficient for certain investments by a universal bank in non-allied activities belonging to categories in S. 376-A; limits include investment in a single non-allied enterprise to 35 percent of total equity or voting stock. - Definitions of Financial Allied Undertakings (S. 372) and Non-financial Allied Undertakings (S. 375) are enumerated (see source for full lists). - EC2 (criteria for judging proposals) - Findings - S. 50 of the GBL mandates the MB to establish criteria for reviewing major acquisitions or investments including corporate affiliations or structures exposing bank to undue risks. - S. 371 of the MORB implements S. 50 and sets guidelines and criteria for major acquisitions or investments; Board must consider criteria and submit certification that criteria were considered when applying for BSP approval. - S. 371 “Criteria for major investments” includes: - (1) Investment must be in accordance with the bank’s business plan and management objectives and consider interests of stakeholders. - (2) Investments should complement/support the main business; extra caution for activities where bank lacks managerial or technical expertise or are high-risk. - (3) Bank management must provide an efficient and effective “exit mechanism” or contingency plan if investee fails. - S. 377 lays out minimum requirements for authority to establish or acquire subsidiaries and affiliates abroad and provides conditions for approval. - EC3 (consistency with licensing criteria; consideration of host country supervisory effectiveness) - Findings - BSP regulations require review whether investment is in accordance with bank’s business plan and will complement/support main business; guidelines advise “extra caution” for high risk investments. - S. 377 requires submission of certification from host country that BSP personnel/examiners are authorized to examine proposed subsidiary or affiliate, allowing BSP to exercise consolidated supervision. - Guidelines do not directly set a clear objective criterion requiring determination whether host jurisdiction consolidated supervision is effective. - Investment by Filipino banks in overseas subsidiaries or operations is minimal. - Review assessments cover potential impact to safety and soundness and capability to manage related risks; processing conducted by appropriate supervising departments of the FSS which coordinate with other departments. - Information sharing MOUs with relevant regulators are in place or being sought to ensure adequate coordination and information flows. - EC4 (assessment of bank resources to handle acquisition) - Findings - S. 371 requires investments be in accordance with business plan and provides list of information/documents to be submitted (management contract, list of Board and senior management, financial information, interest to be held and manner). - To establish a subsidiary or affiliate abroad, applicant bank should meet standard pre-qualification requirements for grant of banking authority; S. 377 provides qualification requirements for proposed officers. - Information provided plus BSP’s off-site/on-site understanding gives supervisor understanding of adequacy of bank’s financial, managerial and organizational resources to handle acquisition/investment. - EC5 (risks from non-banking activities and mitigation) - Findings - S. 372 and S. 375 require prior approval for equity investments in financial allied undertakings and equity investments in excess of 40 percent of voting stock of non-financial allied undertakings; S. 376-A notes prior MB approval required for categories of non-allied undertakings for universal banks. - S. 371 provides conditions on BSP approval including addressing financial, managerial, safety and soundness, compliance or other concerns; BSP may disapprove if proposal constitutes unsafe and unsound practice or violates law, regulation, MB directive or BSP condition. - During application review, BSP on- and off-site examiners are consulted; application and staff recommendations considered by MB, with engagement of bank management as needed. - Assessment of Principle 7 - Compliant - Key comments - BSP possesses adequate powers to approve, reject and impose prudential conditions on acquisitions or investments by a bank. - BSP laws and regulations clearly express permitted investments, thresholds and approval criteria, including investments by or in foreign operations. - BSP does not possess the power to approve major acquisitions by a bank’s parent or the parent’s affiliate; therefore significant non-banking risks may be added to a conglomerate group without notice, review or approval by BSP. ### Supervisory approach and risk assessment framework (Principle 8) - Regulatory perimeter and institutional structure - BSP authorized to supervise and examine banking institutions and QBs, including subsidiaries and affiliates engaged in allied activities (S. 28 of the NCBA). - Supervisory responsibilities extend across universal banks, commercial banks, rural banks, thrift banks and cooperative banks; recent legislation extended supervisory authority over money service businesses, credit granting businesses, and payment system operators. - Almost 50 percent of banking assets are held by the top 5 universal banking institutions. - Recent restructuring - New organizational structure integrated on- and off-site staff: Financial Supervision Sector (FSS) approved by MB Res. No. 520 dated 26 March 2018; reorganization effective January 1, 2019. - FSS subdivided into five subsectors: Financial Supervision Subsectors (FSSSs) I to III, Policy and Specialized Supervision Subsector (PSSS), and Financial Technology Subsector (FTSS). - PSSS includes: Supervisory Policy and Research Department (SPRD), Department of Supervisory Analytics (DSA), Financial System Integrity Department (FSID), Treasury and Asset Management Supervision Department (TAMSD). - FTSS comprises Payment Systems Oversight Department and Technology Risk and Innovation Supervision Department. - Under new structure, on-site and off-site supervision of each banking group is conducted under one group of supervisors; FSSS teams allotted banks and banking groups across range of supervised institutions; one supervisor group handles parent to allied subsidiaries and affiliates. - DSA is central depository of reports from supervised entities; DSA collates and analyzes and provides reports to FSS. SPRD is central policy-making department. - Reorganization is in early phases; assessment mainly based on activities prior to reorganization while acknowledging new approach. - Methodology for risk identification and supervisory planning (EC1) - BSP relies on regulatory reports, micro- and macro-economic inputs, and thematic reviews to determine risks faced by supervised institutions and the banking system. - BSP employs analyses in designing supervisory plan (frequency and intensity), conducting thematic, special and regular on-site examinations. - BSP guidelines establish eight (8) categories of risk for supervision: credit, market, interest rate, liquidity, operational, compliance, strategic and reputation (MORB, Appendix 69). - A methodology identifies D-SIBs; D-SIBs required to comply with heightened prudential standards, including a capital surcharge and development of recovery plans. - ICAAP process provides insight into business models and risk profile; ICAAP stress test results and BSP-conducted periodic stress tests provide forward-looking assessments. - BSP rates institutions using CAMELS Rating and Risk Assessment System (SG No. 2009-21); ratings range from 1 to 5, with a 5 rating being the highest or strongest. BSP is moving to revise rating framework to focus more on key systemic risks and activities. - ROCA Rating System (SG No. 2006-34) used for foreign bank branches; ROCA composite rating 1 to 5 where 5 indicates highest rating and lowest supervisory concern, 1 indicates lowest rating and highest supervisory concern. - D-SIBs must maintain additional Common Equity Tier 1 (CET1) of between 150 and 250 basis points of the bank’s Risk-Weighted Assets; D-SIBs must meet higher supervisory expectations (e.g., recovery plans, Circular No. 904). - BSP conducted a review of supervisory approach and is addressing gaps: analysis of bank’s impact on financial system, calibration of supervisory activities to bank’s impact and risk profile, policies to clarify proportionality, formalized framework for business model analysis, effective peering of banks, and incorporating more dynamic assessment of banks between on-site examinations. Supervisory Assessment Framework Review (SAFR) underway at BSP/FSD. - Methodology for forward-looking risk profiling and supervisory intensity (EC2) - Revised CAMELS (March 2009, SG 2009–21) requires determination of quantity and direction of risk (review of key ratios and direction of change relative to peer group); trends in key risk indicators assessed. - Examiners instructed to consider inherent risk level, appropriateness of risk management mitigation, capacity of board and senior management to identify emerging threats, and significant weaknesses in risk management. - ROEs contain overall rating (CAMELS, ROCA), assessment of overall financial condition and risk management system, risk profile and direction. - BSP conducts regular on-site examinations and off-site surveillance supported by SG and Quality Management Standards (QMS). - Supervisory cycle processes include: - (i) Develop Institutional Profile: Institutional Overview (IO) captures BSFI risk profile, business model and strategic direction, board and senior management quality, risk management, key risk areas, BSP supervisory approach and plan, list of stockholders, Board, principal officers, financial highlights and other relevant information. - (ii) Risk Assessment: SG No. 2015–01 provides off-site risk profiling framework with a 4-risk profile classification/rating: very low, low, lower medium and medium. Financial institutions subject to risk profiling every June and December (continued in source). *Source: 1phlea2020003 - 4. Philippine banks may establish subsidiaries and/or branches in the foreign bank applicant’s home country (excerpt).* ### 1. Complex but not D-SIBs – these include (i) universal banks and commercial banks, and ### 1. Complex but not D-SIBs – these include (i) universal banks and commercial banks, and ### Complex but not D-SIBs - (i) universal banks and commercial banks, and - (ii) thrift and rural banks identified as complex banks under SG No. 2013-05; ### Simple banks not under the PCA framework - Simple banks not under the PCA framework ### NSSLAs not under the PCA framework - NSSLAs not under the PCA framework *https://www.imf.org/-/media/files/publications/cr/2020/english/1phlea2020003.pdf* ### 4. Banks and NSSLAs required to execute a LOC or transitioned to enhanced supervision ### 4. Banks and NSSLAs required to execute a LOC or transitioned to enhanced supervision ### Supervisory plan, on-site examinations and scope - The supervisory plan is documented in the IO and reviewed and approved by FSD management. - On-site examinations are conducted with an interval of at least 12 months between regular examinations. - The MB may authorize a special examination by an affirmative vote of at least five (5) members. - Consolidated supervision is performed through simultaneous on-site examination of the supervised bank and its subsidiaries and affiliates within one conglomerate structure. - Examination objectives: - Assess institution’s risk profile and whether risk management framework and practices are commensurate with existing risk exposures and strategic direction. - Include horizontal analysis comparing the institution with peers and the banking industry. - Scoping process: - Examiner-in-Charge (EIC) together with Department-in-Charges (DEICs) prepare a Scope Memorandum specifying examination type (regular, special or overseeing), methodology (focused or baseline), scope, key risk areas, sampling techniques, staffing, timelines, and deliverables. - Guidance: SG No. 2015-02; scoping guidance SG 2009–33, amended by 2011–03. - Examination output and follow-up: - Main output is the Report of Examination (ROE) containing overall rating (CAMELS, ROCA), assessment of financial condition, risk management system, risk profile and direction, significant issues, and remediation directives with specific timeframes. - Results are communicated to the Board of directors and management. - Banks must provide remediation plans; action plans are monitored by supervising departments and feed into subsequent IOs, supervisory plans and risk assessments. - Assessors found sampled ROEs to be well-written, organized, comprehensive and of high quality. ### Corporate governance, reporting and compliance (EC3) - BSP supervisory approach emphasizes oversight of Board and senior management capabilities and effectiveness. - Circular No. 969 revises corporate governance guidelines; Audit Committee expected to oversee financial reporting framework and ensure accurate, comprehensive reports. - Circular No. 963 sets expectations on banks to maintain reporting systems that produce complete, accurate, consistent, reliable and timely reports; non-compliance may lead to monetary and/or non-monetary sanctions and requirement for a Board-approved action plan. ### Macroeconomic inputs and cross-sector assessment (EC4–EC5) - Macro inputs used in IO and supervisory planning include Financial Stability Report (FSR) and cross-sectoral interagency forum outputs. - Stress testing and ICAAP reviews are used to analyze risks from macroeconomic shocks. - Financial Sector Forum (FSF): - Facilitates consultations and information exchange among members on supervision and regulation. - Example: October 2017 FSF raised crowdfunding, foreign exchange trading, and virtual currency; subsequently BSP issued advisory M-2018-032 regarding online foreign exchange brokerage and trading platforms. - Financial Stability Coordination Council (FSCC): - Voluntary inter-agency council (BSP, SEC, PDIC, IC, DOF) established January 2014; BSP Governor chairs the Executive Committee. - OSRM of the BSP undertakes technical FSCC work, including surveillance frameworks, vulnerability measurement and policy recommendations. - FSCC published first FSR in June 2018. - Banking System Risk Analysis (BSRA) report: - Uses stress-testing and thresholds modelling to identify micro- and macro-level emerging risks; flags management quarter-on-quarter and year-on-year. - Recommends supervisory and policy measures. - Banking Sector Outlook Survey (BSOS) gathers CEOs/Presidents/Country Managers’ sentiments within a two-year horizon to inform supervisory perspectives. ### Stress testing and system-wide surveillance (EC5) - BSP implemented a Uniform Stress Testing Framework for universal and commercial banks, conducted twice a year, in June and December. - Stress testing coverage: - Credit risk: exposure to top 20 conglomerates; exposures by economic activity; consumer finance portfolio with focus on the top 12 conglomerates in the country. - Market risk: simple sensitivity analysis with parallel shift on interest rates per tenor buckets and foreign exchange rates. - BSRA synthesizes reports on real estate exposures, consumer loans, non-performing loans, CAR, cross-border positions, LCR, leverage ratio, and stress testing exercises. ### Resolvability, recovery and resolution frameworks (EC6–EC7) - D-SIB requirements: - BSP requires D-SIBs to develop recovery plans assessed during ICAAP review per Circular No. 904. Recovery plans must set forth concrete actions across scenarios to restore viability, including reducing risk profile, raising/conserving capital, and addressing liquidity pressures. - Current gaps: - No resolvability assessment process in place in conjunction with PDIC for BSP supervised firms, including D-SIBs. - No bank-specific resolution plans have been developed that set out resolution strategy and operating plans for orderly resolution of regulated banks, including large, complex entities or D-SIBs. - Development of resolution plans and resolvability assessments are challenging given complex conglomerate structures; BSP has power to require BSFIs to consider group-wide structure and operations and adopt measures to address impediments to resolvability. - Frameworks: - PCA and Banks for Resolution (BRes) Frameworks and Financial Crisis Management Framework (FCMR) are relied upon to handle banks in times of stress. - BSP Circular No. 523 on the PCA Framework sets initiation and reporting procedures; initiation, approval of MOU, declaration of failure of PCA, lifting and re-initiation shall be reported to PDIC within two banking days from date of MB Resolution for notation. - Banks declared failure of PCA are considered BRes Framework cases. BRes applies to banks with severe deficiencies in capital, poor operating performance and/or critically deficient liquidity, poor corporate governance and significant weaknesses in business processes and risk management. - SG No. 2019–02 aims to provide guidelines and procedures on resolution options: - Negative Resolution—prohibition from doing business, deferral of action on recommendation in ROE with grounds for closure. - Positive Resolution—takeover by qualified third-party investor/willing and capable management, significant stockholders’ infusion, lifting of sanctions relative to PCA failure and transition to enhanced supervision or revert to normal supervision. - Facilitate effective and timely resolution and strengthen coordination with PDIC. - Implementation concerns: - PCA and BRes frameworks are implemented primarily as enhanced supervision tools to return troubled firms to health, not as full crisis resolution frameworks. - BRes only authorizes BSP to ‘facilitate’ mergers or acquisitions while an institution is open and operating; framework implementation can be ponderous, risking regulatory forbearance and delayed action. - The FCMR (adopted April 1, 2016; amended September 2, 2016) is founded on existing resolution tools which do not include bank-specific resolution plans and has not been applied in real crisis events. ### Regulatory perimeter and bank-like activity oversight (EC8) - Banking activities are broadly defined; most bank-like activities fall within BSP’s regulatory ambit (banking, investment houses, trust). - BSP maintains information-sharing MOAs with relevant domestic authorities; cited instances of coordination on nonbank entities posing systemic risk. - No reported instances of restructuring to avoid regulation. - Recent BSP charter amendments brought activities within perimeter: money service business, credit granting agencies and payment system providers; BSP is establishing staff structures and policies to supervise these. - FSD initiated an off-site surveillance function to monitor financial institutions not supervised by BSP using various media. - Limitations: Restrictions on BSP authority over broader non-banking conglomerate groups mean some bank-like activities could escape BSP oversight. ### Supervisory techniques, tools and information systems (Principle 9) - Organizational changes: - Effective January 2019, FSS reorganized to combine off-site supervision and on-site examination into one department, FSD. - On-site/off-site mix: - FSD conducts risk-focused on-site examinations with an interval of at least 12 months. - Examinations use generalist staff supported by specialist teams and off-site analysis. - D-SIBs receive the most frequent and intensive examinations. - Planning and quality control: - Processes guided by multiple SGs and the Manual of Examination Procedures for BSFIs (REF-SES-Onsite-02-21-000). - Quality controls via QMS; on-site examination and off-site surveillance QMS in place. - FSD management reviews and approves key documents, including the ROE; FSD management heads meet monthly to review plans and operations. - Tools and outputs: - Bank Performance Report (BPR) and Bank Dashboard provide detailed financial and non-financial information, business model descriptions and primary risk concerns. - Heat Map rates riskiness of key industry areas on a scale of 1 to 4 (with 4 as highest). - Information systems: - Data intake/validation involves a two-step process identifying completeness/accuracy; unacceptable reports are rejected and habitual offenders flagged. - Data systems being upgraded: web portal submission and phased development of a comprehensive Data Warehouse with business intelligence tools. - Data Warehouse content: capital adequacy ratios/statistics, SME and Agri-Agra compliance profile, reserve position and reports, trust statistics, financial statements, reported crimes and losses, special authorities, directors/officers of supervised institutions, BPR and other prudential indicators. ### Supervisory reporting, data requirements and validation (Principle 10) - BSP has statutory power to require reports on solo and consolidated bases (S. 25 NCBA; S. 28 NCBA; S. 60 GBL). - Appendix 7 of the MORB specifies required reports and frequency by institution type. Required reports include (exact listing preserved): 1) Financial Reporting Package (FRP) 2) Published Balance Sheet 3) Capital Adequacy Ratio Report 4) Report on Real Estate Exposures 5) Liquidity Coverage Ratio Report/Minimum Liquidity Ratio Report 6) Leverage Ratio Report 7) Report on Material Related Party Transactions 8) Conglomerate Structure 9) Credit and Equity Exposures to Individuals/Companies/Groups aggregating Php 1.0 million and above to be submitted on quarterly basis 10) Foreign Exchange (FX) Position Report 11) ICAAP Document and Recovery Plan 12) Uniform Stress Testing Report 13) DOSRI (Directors, Officers, Stockholders and Related Interests) Report 14) Report on Required Reserves 15) Report on Crimes and Losses (crime-related incidents to which banks have been exposed) 16) Annual Report - Bank Performance Report (BPR) provides comparative information across time periods and peers. - BSP relies on banks as first line of defense for accuracy of prudential reports; regulations require integrity and accuracy; BSP conducts additional validation and pursues deficiencies. - Circular No. 963 and Circular No. 969 set expectations for reporting governance and audit oversight. - Where additional information is needed, BSP may conduct targeted surveys through FSDs. ### Supervisory engagement, escalation and timelines (EC7–EC9, EC10) - Communication with Boards and senior management primarily occurs during on-site examinations; ad hoc in-between contacts occur but are not on an established schedule. - Independent directors: - SG No. 2018-01 requires examiners to hold a meeting with independent directors to discuss control/self-assessment functions, implementation of code of ethics, conflict of interest handling, whistle blowing policy, and other key areas. - ROE follow-up: - After ROE release, bank has 30 calendar days to submit a report containing: (1) actions taken on each directive with documentary evidence; and (2) action plan for directives not fully complied with and committed timelines. - Non-compliance may result in escalated enforcement actions: monetary/non-monetary sanctions, execution of a LOC, or placing the bank under PCA. - SG 2016-10: LOCs generally prescribe a one (1) year period to comply with commitments; the one-year timeline is generally not extendible except in meritorious cases. - SG 2016–03 on enhanced supervision provides PCA period of (1) year from initiation within which to implement corrective measures; PCA period can only be extended in exceptional cases, which should not exceed three (3) years and require prior MB approval. - Monitoring: - BSP monitors outstanding supervisory issues via regular monthly FSD management meetings and quarterly updates on LOCs and PCAs submitted to the MB. - In practice, follow-up on directives and LOCs is conducted primarily during on-site examinations; LOCs have been amended/extended and firms can remain in PCA status for prolonged periods. - Notifications and external auditor reporting: - Regulations require prior BSP approval for substantive structural/activity changes (licenses, branches, mergers/acquisitions, certain equity investments). - Banks must immediately report breaches in prudential requirements like CAR and LCR and activation of recovery plans. - Circular No. 900 requires institutions to notify BSP within 10 calendar days from date of discovery of operational risk events that may result in: (i) significant operational losses or exposures; (ii) activation of business continuity plan; or (iii) any material change in business and operating environment. - External auditors must submit to BSP within 15 calendar days after closing the audit engagement a notarized certification that there are no matters to report (S. 174 and Appendix 55 of the MORB). - No explicit regulatory mandate for general notification of ‘material adverse developments’, although practice shows timely communication. ### Reliance on third parties and internal audit (EC6, EC11) - BSP has authority to contract third-party consultants/advisors but has not appointed independent third parties to conduct supervisory tasks to date. - S. 58 of the GBL allows MB to require a bank to engage an independent auditor from a list acceptable to MB for resident examiner or special engagements. - Internal audit: - Circular No. 871 sets regulations on Internal Audit (IA) including responsibilities, required professional competence, independence, objectivity, charter and scope. - Assessment of IA adequacy is conducted during on-site examination. ### Assessments, overall compliance and recommendations - Assessment of Principle 8: Largely Compliant. - BSP maintains an effective, evolving supervision system and reviews system-wide risks, but lacks resolvability assessments and bank-specific resolution plans for supervised firms including D-SIBs. - BSP’s early intervention and resolvability assessment processes for D-SIBs are not fully developed. - Recommendations: - Develop and implement, in conjunction with PDIC, policies and standards to assess resolvability of firms, especially D-SIBs, in an orderly fashion. - Develop and implement policies and standards requiring regulated financial institutions to support a resolvability assessment, including consideration of interconnectedness, structure and operations within the wider group and adopt measures to address impediments to resolvability. - Assessment of Principle 9: Compliant. - BSP employs an effective range of techniques and tools, integrates on-site and off-site monitoring, and incorporates bank-level and system-wide analyses into examinations. The 2019 integration of functions into FSD remains to be fully assessed over time. *Source: 1phlea2020003 - 4. Banks and NSSLAs required to execute a LOC or transitioned to enhanced supervision* ### Appendix 7 of the MORB provides the list of reports to be submitted to the BSP. The ### Appendix 7 of the MORB: List of Reports to be Submitted to the BSP ### Reports required (solo and consolidated where specified) - Financial Reporting Package (FRP) - Set of financial statements for prudential reporting composed of the Balance Sheet, Income Statement and Supporting Schedules. - Provides information on on- and off-balance sheet accounts, profit and loss, liquidity, asset concentrations, asset quality, loan loss provisioning, interest rate risk and market risk. - FRP template is being revised to update accounts to comply with PFRS 9 Financial Instruments; mapping of old accounts with PFRS 9 accounts is provided under Circular No. 1011. - S. 175 of the MORB provides requirements on quarterly publication of financial statements on solo and consolidated basis. - Scope/ frequency by bank type: - Universal and commercial banks: entire FRP report (balance sheet, income statement and all supporting schedules) required quarterly (solo); consolidated as appropriate. - Thrift banks: balance sheet, income statement and supporting schedules except derivatives activities required quarterly. - Rural and cooperative banks: simplified FRP format; supporting schedules only for accounts/transactions within generally authorized activities. - Solo basis: combined financial statements of head office and branches/other offices. Consolidated basis: parent bank and subsidiaries consolidated line by line; only banks with financial allied subsidiaries, excluding insurance subsidiaries, submit consolidated report. - S.172 of the MORB: banks shall adopt the PFRS; for prudential reporting banks shall adopt PFRS in all respects except preparing consolidated financial statements and accounting for ROPA; financial audit reports required to be PFRS compliant. - Capital Adequacy Ratio (CAR) Report - S. 125 and Appendix 59 implement revised risk-based capital adequacy framework (Basel III) applicable to universal banks and commercial banks, their subsidiary banks and QBs. - S. 125 requires banks “shall submit a report of their risk-based capital adequacy ratio on a solo basis (head office plus branches) and on a consolidated basis (parent bank plus subsidiary financial allied undertakings, but excluding insurance companies) quarterly to the appropriate supervising department of the BSP in the prescribed forms within the deadlines, i.e., fifteen (15) banking days and thirty (30) banking days after the end of reference quarter, respectively.” - S. 127 and Appendix 62 implement simplified risk-based capital adequacy framework (Basel 1.5) for stand-alone thrift banks, rural banks and cooperative banks effective 1 January 2012. S. 127 requires quarterly submission on solo and consolidated bases within deadlines, i.e., fifteen (15) banking days and thirty (30) banking days after the end of the reference quarter, respectively. - Report on Expanded Real Estate Exposures - BSP Memorandum No. M-2012-046 (dated September 21, 2012) requires universal, commercial and thrift banks and their trust departments to submit an Expanded Report on Real Estate Exposures on solo and consolidated basis. - Enhanced under Circular No. 976 to require more granular information on real estate exposures. - Liquidity Coverage Ratio (LCR) Report / Minimum Liquidity Ratio (MLR) Report - S. 145-A and Appendix 72 provide LCR framework guidelines applicable to all universal and commercial banks including branches of foreign banks. - Banks shall report LCR position for liquidity risk exposures on monthly (solo) and quarterly (consolidated) basis. - Circular No. 996 extended the same LCR requirement to subsidiary banks and QBs of universal and commercial banks on a monitoring basis. - See discussion at BCP 24 regarding needed improvements to liquidity risk reporting and management. - Leverage Ratio Report - S. 129 and Appendix 116 provide Basel III Leverage Ratio Framework guidelines applicable to universal and commercial banks and their subsidiary banks/QBs. - S. 129 requires that “…banks shall submit the Basel III Leverage Ratio reporting template, including required disclosure templates, on both solo and consolidated bases for monitoring purposes.” - Reports on Related Party Transactions (RPT) (solo basis only) - Weekly, twice annual, and other reports on transactions involving bank’s directors, officers, stockholders and their related interests and material exposures to related parties. - Reports on Large Exposures (solo basis only) - Report on Credit and Equity Exposures to Individuals/Companies/Groups aggregating Php 1.0 million and above to be submitted on quarterly basis. - FX Position Report (consolidated basis only) - Manual on Foreign Exchange Transactions requires banks to submit monthly foreign exchange position report on a consolidated basis. - ICAAP Document - Universal and commercial banks required to prepare an ICAAP document on a banking group-wide basis to be submitted to BSP annually. - Foreign bank branches required to prepare an ICAAP document in accordance with the nature, size, and complexity of their business in the Philippines. - D-SIBs must submit a recovery plan covering all institutions in the banking group and affiliates assessed by the D-SIB as essential to restore, or will have an impact on, the banking group’s viability and financial position; recovery plan shall be integrated in the bank’s ICAAP Document. - Organizational Structure and Operational Policies - S. 173 of the MORB requires banks to submit to FSS information on bank’s profile and documents/information on organizational structure and operational policies; Appendix 9 lists documents/information required and allows for additional items as needed. ### Supervisory expectations and findings on reporting, valuation, governance and data access (EC2–EC8) - EC2: Accounting standards and FRP structure - BSP provides reporting instructions describing accounting standards for supervisory reports; adjustments made for regulatory reports but financial statements are required to be based on accounting principles widely accepted internationally. - FRP divided into five parts: (1) General Instructions; (2) Structure of the FRP; (3) Revised Manual of Accounts; (4) Line Item Instructions for Balance Sheet, Income Statement and Supporting Schedules; (5) Report Formats for solo and consolidated reports. - Current FRP template to be revised to implement recent changes under PFRS 9. - EC3: Governance, valuation methodologies, and validation - BSP regulations require sound governance structures and control processes related to valuation; standards for internal models exist and standalone model risk management regulations are being developed. - BSP assesses valuations during on-site examinations and has authority to adjust valuations and impose higher capital requirements. - Circular No. 969 updates corporate governance regulations requiring Boards to establish Audit and Risk Oversight Committees. - Audit Committee: oversee financial reporting framework and ensure accurate and comprehensive information and reports. - Risk Oversight Committee: oversee enterprise risk management framework and periodic review of risk management systems and recovery plans. - S. 142 of the MORB requires supervised banks to adopt an effective risk management framework with policies and controls commensurate with size, complexity, risk profile, and systemic importance and applied group-wide. - Circular No. 1021 aligns regulations with PFRS 13 on Fair Value Measurement and requires adequate governance and control processes for prudent and reliable valuations. - S. 144 and Appendix 70 provide market risk management guidelines including Board and senior management oversight, measurement models, and independent validation. - Circular No. 855 requires banks to develop and document sound loan loss methodology; Circular No. 1011 provides detailed guidelines on expected credit loss model. - Circular No. 639 on ICAAP and SRP requires ICAAP methodologies, assumptions and procedures and supporting policies to be formally documented and reviewed and approved by the Board. - Memorandum No. M-2014-011 sets expectations for external auditors to evaluate whether valuations, methodologies, assumptions, valuation policies and provisioning for loan losses are appropriate and consistent with applicable financial reporting framework. - EC4: Frequency and granularity of data collection - BSP collects information at frequencies commensurate with type of bank and activity; S. 173 requires periodic reports at varied frequencies (Appendix 7). - Examples of frequency: - Consolidated Daily Report of Condition and Report on Required and Available Reserves on Deposits and Deposit Substitutes: weekly. - LCR position: monthly (solo) and quarterly (consolidated). - FRP (solo) for universal and commercial banks: monthly; for thrift and rural banks: quarterly. - CAR report: quarterly. - Data aggregated and analyzed for submission to MB (e.g., BSRA submitted to the Board quarterly). - BSP off-site risk profiling framework (SGs No. 2015-01) applies a 4-risk profile classification/rating (very low, low, lower medium and medium). - Information used to develop a “Heat Map” with a 1 to 4 scale (4 as highest) across asset quality, liquidity, profitability, and solvency. - Regulatory reports (e.g., FRP) used to develop the IO to scope on-site examinations. - EC5: Comparability and standardization - Reporting requirements supported with filing instructions and definitions, standardized forms, comparable reporting dates/timeframes, templates and taxonomy, and validation processes. - Data collected on solo and consolidated bases as appropriate and is comparable across similar firms for peer analysis. - BSP may collect ad hoc data on topics of concern. - EC6: Power to request information from group entities and limitations - Under S. 4 of the GBL, BSP has supervision and regulatory powers over quasi-banks, trust entities and other financial institutions subject to BSP supervision and can request information from supervised banks, subsidiaries and financial allied affiliates. - BSP authority does not extend to obtaining information from non-regulated entities in the wider group (except individual transactions), including non-allied affiliates. - Bank secrecy laws restrict availability of information regarding identity of depositor account holders. - S. 23 of the NCBA, as amended, grants BSP authority to require “any data” from any person or entity for statistical and policy development purposes but constrained by confidentiality laws (“...provided, that the release of disaggregated data gathered shall be subject to prevailing confidentiality laws.”) - BSP employs ‘work-arounds’ (e.g., conglomerate ‘map’, related party transaction reports, large exposure reports) to gain visibility into wider group information; these are not fully satisfactory. - Sharing of information submitted by entities in a conglomerate is being studied at the Financial Conglomerate Supervision Committee (FCSC) under the FSF. - EC7: Access to bank records and personnel - BSP has power to access supervised bank records and to access bank Board, management and staff when required, though Bank Secrecy Laws restrict access to depositor information. - S. 25 of NCBA provides FSS department heads and examiners the power to administer oaths and compel presentation of books, documents, papers or records necessary to ascertain the true condition of any bank, subject to confidentiality provisions. - S. 28 of NCBA provides heads of supervising/examining departments the duty to examine books during regular or special examinations and requires banks to afford full opportunity to examine its books. - Circular No. 957 provides for conduct of examinations including interviews of directors, officers and personnel; verification, review and evaluation of documents and records; making copies; taking possession of records and custody by BSP after giving proper receipts; and defines “records.” - EC8: Enforcement, accountability and data quality assurance - BSP has adequate means to enforce compliance with reporting and information requirements to ensure timely and accurate submissions. - Board (in particular the Audit Committee) and senior management (in particular the Chief Risk Officer, where required) are held responsible for accuracy of supervisory returns. - BSP can impose sanctions for misreporting and persistent errors through validation and review processes (including tracking inaccurate or non-responsive submissions) and can require amendment of inaccurate information. *Source: Appendix 7 of the MORB and related sections as provided in the source content.* ### Appendix 7 of the MORB lists the reports required of banks and the frequency and ### 1phlea2020003 - Appendix 7 of the MORB lists the reports required of banks and the frequency and deadline of submissions ### Reporting requirements, governance, and signatory responsibilities - Appendix 7 of the MORB lists the reports required of banks and the frequency and deadline of submissions. - S. 173 of the MORB provides the different categories of reports classified based on prudential importance and the required signatories per category of report. - Circular No. 747 (Revised Compliance Framework for Banks): - The Chief Compliance Officer of a bank shall also be responsible for ensuring the integrity and accuracy of all documentary submissions to the BSP. - Smaller banks (e.g., rural banks) are allowed to have its compliance officer fulfill requirements imposed upon a Chief Risk Officer at larger institutions. - Circular No. 963 (Bank Responsibility for the Generation and Timely Submission of Required Reports to the BSP): - Sets out the BSP’s expectation that banks establish an effective reporting system with an appropriate governance process to generate and timely submit reports in accordance with BSP’s reporting standards. - Reports submitted to the BSP must be complete, accurate, consistent, reliable and timely. - Banks are expected to have adequate internal controls to ensure adherence to reporting standards. - CL-2018-074: - Issued on the updated validation rules used by the BSP to determine whether the entries in the FRP are balanced and reconciled or cited with mathematical defects requiring correction and the submission of amendments that are subject to penalty. - A User Guide explains and describes the validation process. ### Classification of report non‑compliance and penalties - S. 171 of the MORB defines sanctions on reports for non-compliance with reporting standards and classifies reports as: - Erroneous report — A report submitted within the prescribed deadline but found non-compliant with BSP reporting standards. Submission of an Erroneous Report shall be considered as willful failure to comply with a regulation. - Delayed report — A report that complied with BSP reporting standards after the submission deadline. Submission of a compliant report after the submission deadline shall be considered as willful delay in submission of reports. - Unsubmitted — A report not submitted or submitted but not compliant with BSP reporting standards by the time the next report becomes due or upon the lapse of thirty (30) banking days from the report’s submission deadline, whichever comes first. Non-submission shall be considered as willful refusal to comply with a regulation. - Monetary penalties: - Applicable monetary penalty is based on a prescribed fine for each occurrence (Erroneous reports) or for each day (Delayed or Unsubmitted reports) and will accumulate until the report is determined compliant. - Habituality and non-monetary sanctions: - A demerit point system is applied to determine habituality (repetitive incurrence of reporting violations). - When a bank is considered habitual, BSP shall require the bank to undertake measures to address root causes and may apply non-monetary sanctions under S. 37 of the NCBA, restrict/suspend branching privileges, and restrict special authorities for new products and services. - Non-monetary sanctions continue until habituality is addressed. - Habituality is considered addressed and sanctions lifted if the bank did not incur any demerit points (i.e., none of the reports was classified as Erroneous, Delayed, Erroneous and Delayed, or Unsubmitted) for at least three (3) consecutive months from the time the habituality was observed. - Erroneous reports are considered not submitted until correct/amended reports are submitted to the BSP. ### Validation, verification, and use of external experts - EC9 — Policies and procedures to determine validity and integrity of supervisory information: - BSP requires banks to ensure validity and integrity of supervisory information. - Regulatory reports are subject to a validation process and are reviewed upon development of the IO at the commencement of the examination cycle. - External auditors are required to certify that financial reports are accurate and consistent with accounting standards. - Circular No. 963 reiterates expectations on completeness, accuracy, consistency, reliability and timeliness; significant deficiencies require a Board-approved action plan with specified time frame; non-implementation can lead to BSP Supervisory Enforcement Policy action. - EC10 and EC11 — External experts: - To date, the BSP has not appointed external experts (such as external auditors) to conduct supervisory tasks or to examine specific aspects of banks’ operations. - S. 58 of the GBL allows the MB to require a bank to engage an independent auditor chosen by the bank from a list acceptable to the MB; terms of engagement prescribed by the MB, either continuing (resident examiner) or special engagements. - EC11 — Requirement for external experts to report material shortcomings: - To date, not applicable because BSP has not appointed external experts for supervisory tasks. - EC12 — Periodic review of collected information: - BSP revises data collection when there is a new/revised prudential standard, in response to supervisory needs or risks observed, to allow domestic application of revised international standards or to align requirements across regulated industries. - Examples: - 2013 task force rationalized reports submitted to the DSA, International Operations Department and Department of Economic Statistics; certain reports were revised and discontinued under Circular No. 846. - A second review of reports began in 2018. ### Corrective actions, supervisory tools, and escalation framework - Assessment re Principle 10: Compliant. - BSP has an effective set of reporting requirements to view and analyze prudential reports on a solo and consolidated basis and adequate power to require and receive reports on financial condition, performance and risks. - BSP regulations require banks to demonstrate effective governance and internal controls, including valuations, and BSP has reviewed and challenged valuation methodologies and assumptions where relevant. - BSP has limitations in requiring submission of all relevant information from the wider banking group due to restrictions on its supervisory remit; it should continue to enhance methodology for assessing risks posed by the wider group, including obtaining necessary information for resolution planning and resolvability analysis. - EC1 — Early engagement and remedial process: - Supervisory concerns raised primarily by issuance and delivery of the ROE upon completion of the annual examination. - Examinations historically conducted every 12–14 months; NCBA now allows BSP to schedule examinations using a risk-based approach (e.g., rural bank examinations on a greater than annual basis). - Off-site monitoring can trigger supervisory actions prior to scheduled on-site examinations. - Prior to formal ROE issuance, examination teams communicate on-site issues in soft and final exit conferences and obtain management commitments and timelines; FSD conducts post-examination meetings with the Board before ROE release. - ROE specifies corrective actions; a written Board response including a remediation plan is required. - Supervisory concerns are categorized into: (1) required actions; (2) expected actions; and (3) observations, each with timeframes, expectations regarding the FI’s response, and supervisory follow-throughs (SG 2008-28). - Failure to take corrective actions can lead to escalation: formal LOC, issuance of CDOs, initiation into PCA Framework (subject to MB approval) for banks with material weaknesses. - EC2 — Range of supervisory tools and five‑phase supervisory continuum: - Supervisory Enforcement Policy (S. 002 of the MORB) provides a menu of enforcement actions and supervisory tools; SG No. 2016-09 issued for internal guidance. - BSP’s supervisory continuum (increasing intensity with severity): - (i) Normal Supervision approach — regular on-site examination and off-site monitoring; address minor problems. - (ii) Enhanced Supervision approach — escalating enforcement actions to address emerging concerns. - (iii) PCA Framework — directs Board of an institution with higher-than-normal risk of failure to institute measures to restore normal condition within a reasonable period. - (iv) BRes approach — more intrusive for institutions with critically serious problems and persistent uncorrected violations. - (v) Intervention and Resolution — final phase ending with appointment of the PDIC as receiver. - Due process observed in enforcement actions; opportunity for management to respond can generate delays, but BSP can take immediate action in severe circumstances. - EC3 — Power to act when regulatory thresholds breached: - BSP can act where a bank falls below regulatory thresholds, including capital, liquidity (LCR and NSFR), real estate exposures, and violations of supervisory limits (e.g., single borrower and related party transaction limits). - Periodic reports (monthly or quarterly) on compliance with ratios can drive supervisory responses. - BSP requires banks whose CAR barely meets minimum regulatory requirement to submit plans of action with specific timelines. - D-SIBs (pursuant to Circular No. 904) must prepare and submit recovery plans incorporating capital and liquidity-based triggers; recovery plans activate, for example, when a bank breaches its regulatory capital level plus a management buffer of 100 bps. BSP is to be notified of activation of recovery plans; such notification has not occurred. - EC4 — Broad range of measures to address issues early: - BSP can require timely corrective action or impose sanctions expeditiously and set out clear prudential objectives or actions, which may include restricting activities, imposing more stringent limits, withholding approval of new activities or acquisitions, restricting/suspending payments to shareholders or share repurchases, restricting asset transfers, barring individuals from the banking sector, replacing or restricting powers of managers/Board/controlling owners, facilitating takeover/merger, providing interim management, and revoking or recommending revocation of banking license. - BSP escalates matters via its supervisory continuum and applies more severe tools as needed; supervisory directives are regularly issued upon completion and delivery of the ROE. - Supervisory enforcement policies incorporate principles of due process. *Source: 1phlea2020003 - Appendix 7 of the MORB lists the reports required of banks and the frequency and deadline of submissions* ### 1. Required Actions constitute the highest priority in supervisory matters. Written ### 1. Required Actions constitute the highest priority in supervisory matters. Written ### Priority of supervisory communications and expected responses - Required Actions: - Constitute the highest priority in supervisory matters. - Written communication specifies a timeframe in which the action must be completed. - The timeframe for addressing required actions is generally short, may be “immediate,” but is almost always within 30 to 90 days. - Expected Actions: - Require lesser priority than Required Actions. - Written communications specify a timeframe in which actions are expected, although the timeframe (at least initially), may require estimation. - For required and expected actions, the institution is expected to provide the BSP with a written response regarding the plan for, progress, and/or achievement of the expected action. - Observations: - Constitute supervisors’ insight about sound industry practices that, if adopted, are seen to improve the efficiency and effectiveness of the bank. - Raised less formally, most of the times, verbally, in meetings and conferences. ### Enforcement and escalation framework - Failure to comply with supervisory directives can be escalated, and formal enforcement actions taken. - Main categories of enforcement action: - a) Corrective actions: - 1. BSP Directives—orders and instructions requiring specific actions or to refrain from activities within a prescribed timeline. - 2. LOC—a formal enforcement action where the Board is required, upon approval and/or confirmation by the MB to execute a written commitment to undertake a specific positive action or refrain from performing an activity within a given time period. - b) Sanctions—subject to the prior approval and/or confirmation by the MB. Such sanctions include: - 1. Supervised Banks: - a. Restrictions on Activities and Privileges - b. Suspension of Authorities, Privileges and Other Activities - c. Divestment and/or Unwinding - d. Monetary Sanction—Penalties/Fines Against the bank - 2. Directors and Officers: - a. Reprimand - b. Restriction on Compensation and Benefits - c. Divestment - d. Suspension - e. Disqualification - f. Removal - g. Monetary Penalties/Fines - c) Other Supervisory Actions—subject to prior MB approval, the BSP, when warranted, may deploy other supervisory actions, such as: - (i) initiation into the PCA Framework; - (ii) issuance of a cease and desist order against the institution as well as its directors and officers; - (iii) conservatorship; and - (iv) prohibiting the bank from doing business in the Philippines and appointing the PDIC as receiver. ### Prompt Corrective Action (PCA) Framework — placement triggers - A supervised institution is placed into the PCA Framework (S. 4.6 of the GBL and S. 003 of the MORB) under any or all of the following conditions: - 1. When either of the Total Risk-Based Ratio (otherwise known as CAR), Tier 1 Risk-Based Ratio, or Leverage Ratio (Total Capital/Total Assets) falls below 10 percent, 6 percent and 5 percent, respectively, or such other minimum levels that may be prescribed for the said ratios under relevant regulations, and/or the combined capital account falls below the minimum capital requirement prescribed under BSP regulations; - 2. The Capital Adequacy, Asset Quality, Management, Earnings, Liquidity and Sensitivity to Market Risk (“CAMELS”) composite rating is less than “3” or a Management component rating of less than “3”; - 3. A serious supervisory concern has been identified that places a bank at more-than-normal risk of failure in the opinion of the Director of the examination department concerned, which opinion is confirmed by the MB. Such concerns could include, but are not limited, to any one or a combination of the following: - a) Finding of unsafe and unsound activities that could adversely affect the interest of depositors and/or creditors (see BSP Circular No. 341 as amended by BSP Circular No. 640); - b) A finding of repeat violations of law or the continuing failure to comply with MB Directives; and, - c) Significant reporting errors that materially misrepresent the bank’s financial condition. ### Sanctions for PCA noncompliance - Sanctions may be imposed on any bank subject to PCA whenever there is unreasonable delay in entering into a PCA plan or when PCA is not being complied with. These may include any or all of the following: - 1. monetary penalty on or curtailment or suspension of privileges enjoyed by the Board or responsible officers; - 2. restriction on existing activities that the supervised financial institution may undertake; - 3. denial of application for branching and other special authorities; - 4. denial or restriction of access to BSP credit facilities; and, - 5. restriction on declaration of dividends. ### MOU and PCA Plan (PCAP) - Banks initiated into the PCA Framework are required to execute an MOU, which is a bilateral agreement between the bank and BSP and implement the same using a PCA Plan (PCAP). - The PCAP contains measures to restore the entity to normal operating condition within a reasonable period. - Components of the MOU and PCAP include: - Capital Restoration Plan - Business Improvement Plan - Corporate Governance Reform - Submission of the MOU and the PCAP, as well as the attainment of the commitments therein, are to be covered by prescribed timelines. - SG No. 2016-03 on the Enhanced Internal Policies and Procedures on Handling Banks Initiated to the PCA Framework provides for the basic/standard provisions of the MOU. ### Cease and Desist Orders - S. 37 of the NCBA provides that if the bank and/or the directors and/or officers concerned continue with or otherwise persist in the commission of the indicated unsafe/unsound banking activity or violation, the MB may issue an order requiring the institution and/or the directors and/or officers concerned to cease and desist from the indicated practice or violation, and may further order that immediate action be taken to correct the conditions resulting from such practice or violation. - The cease and desist order shall be immediately effective upon service on the respondents. - The respondents shall be afforded an opportunity to defend their action in a hearing before the MB or any committee chaired by any MB member created for the purpose, upon request made by the respondents within five days from their receipt of the order. - If no such hearing is requested within said period, the order shall be final. - If a hearing is conducted, all issues shall be determined based on records, after which the MB may either reconsider or make final its order. ### Banks for Resolution (BRes) - Banks are placed into a BRes status should they not meet the requirements/conditions in the PCA MOU, reflect severe deficiencies in capital, poor operating performance and/or critically deficient liquidity, poor corporate governance and significant weaknesses in business processes and risk management, which are unlikely to be addressed in the near term (i.e., one year or less). - Generally, BRes status includes banks declared as PCA failure or candidates for PCA failure. ### Closure and appointment of PDIC as Receiver; Prohibition QMS triggers - S. 30 of the NCBA and S. 53 of the GBL lay the grounds for prohibiting a bank/QB from doing business. - Determination of the existence of any of the grounds under S. 30 of the NCBA can be based on a report of the appropriate supervising and examining department of the BSP which may recommend to the MB the prohibition of the institution from doing business. The report can be based on an on-site examination conducted, either solely by the BSP or jointly with the PDIC. - The process to prohibit an institution from doing business is set forth in the Prohibition QMS issued June 11, 2018. It provides for the following triggers: - 1. Public announcement of bank holiday or suspension of the payments of its deposit liabilities for more than 30 days; - 2. Bank run; - 3. Result of regular/special/overseeing examination; *Source: IMF staff summary of supervisory framework and enforcement measures as presented in the provided content.* ### 4. Expiration of corporate life. ### 4. Expiration of corporate life ### Monitoring, tracking, and supervisory lifecycle - The BSP tracks and monitors LOCs and PCA/BRes status. - No tracking mechanism was provided with respect to Directives (required or expected actions). - Compliance with directives is primarily achieved during annual on-site reviews. - BSP does not maintain a monitoring system that demonstrates the ‘lifecycle’ of a supervisory issue from directive to LOC and throughout the supervisory ‘continuum.’ - No aging report is available to monitor and flag supervisory directives that are not concluded within or in comparison to initial expected remediation dates. ### PCA, BRes, escalation, and time-to-resolution - Applying the supervisory ‘continuum’ concept, BSP elevates directives that have not been complied with to require LOCs. LOCs can be amended and, in meritorious cases, be extended subject to defined conditions. - PCA and the BRes Framework sit at the end of the supervisory continuum and are intended to bring a supervisory focus on firms that are at risk of failure and, by execution of a PCA MOA, compel prompt remediation of the firm and restoration to financial stability. - The BRes Framework is intended primarily to facilitate a merger, acquisition or capital injection. - In practice, banks placed into PCA can linger in such status for prolonged periods (years), during which time the firms can remain capital deficient. - The PCA framework has not operated effectively to require firms to be placed into resolution at an early stage, and before equity has been exhausted. - Escalation of PCA enforcement actions is not clearly tied by law or regulation to stages of decline in regulatory capital levels, and resolution/receivership has not been imposed even where bank owners have demonstrated an inability or unwillingness to recapitalize the firm unless grounds under Sec. 30 of the NCBA, as amended, exist. - Institutions that have been closed (forbidden to do business) and for which the PDIC has been appointed receiver have been in a state of negative equity, imposing losses upon the deposit insurance fund that could have been avoided or mitigated with prompt action. - Not acting quickly to address and correct significant supervisory concerns: - allows firms to operate with deficient capital and management; - encourages moral hazard risks; - exposes the deposit insurance fund to loss; and - can threaten public confidence in the regulatory system. - BSP conducted a reassessment of the portfolio of PCA banks in 2014 to align classification with the BSP Enhanced Supervisory Enforcement Regime. - BSP issued the Enhanced Internal Policies and Procedures in Handling Banks Initiated into the PCA Framework (SG No. 2016-03 dated 10 February 2016). - Implementation of PCA strengthened with the introduction of the PCA QMS to ensure PCA timelines are observed. - Historical and recent average periods to resolution of PCA status: - For banks initiated into PCA from years 2006 to 2014: average time period to resolution spanned 4.64 years. - For banks initiated into PCA from 2015 to present: average period to resolution of PCA status is 2.14 years from PCA initiation. - Strengthening of internal guidelines on receivership/prohibition from doing business of banks is in process. - BSP has revisited its LOC Framework and a corresponding SG is under review. - Recommendation (excerpted): - BSP is encouraged to continue ongoing revisions to the PCA framework and implement policies and procedures that will operate to ensure that firms placed into PCA status are addressed in a timely fashion, constrain undue regulatory forbearance, and place firms into resolution in a prompt and timely fashion. ### Legal grounds for closure and receivership - Grounds for prohibition of banks from doing business and appointment of PDIC as receiver are provided in Section 30 of the NCBA. - Presence of any of the grounds mentioned in Section 30 is sufficient legal basis to order closure of a bank; these grounds: - are not tied to capital levels; and - do not mandate that a bank reach a state of negative equity before the bank can be closed. - BSP reports instances when closure of banks with positive capital has been ordered in view of presence of ground for closure. ### Sanctions, corrective actions, and ring-fencing (EC5 and EC6) - BSP has the authority to apply sanctions to the bank and also to management and/or the Board, or individuals therein. - S. 37 of the NCBA provides administrative sanctions on banks and quasi-banks, their directors and/or officers, for willful violation of banking law, regulation, or instruction issued by the MB or the Governor, and/or conducting business in an unsafe or unsound manner; administrative sanctions include fines, suspension of rediscounting privileges, among other sanctions. The MB may preventively suspend any director or officer pending investigation. - S. 003 of the MORB on supervisory enforcement policy provides sanctions that may be imposed on bank directors and officers, subject to prior MB approval and/or confirmation; such sanctions include reprimand, restriction on compensation and benefits, divestment, suspension, disqualification and removal. - BSP has adopted a Sanctions QMS which defines criteria for the evaluation/imposition of sanctions. - BSP possesses adequate authority and supervisory tools to restrict supervised institutions’ activities (e.g., restricting capital flows, activities, rejecting mergers or acquisitions, or imposing funding or liquidity restrictions). - Limitations in fully protecting banks from actions of parent companies and affiliates: - Parent companies and affiliates often fall outside the regulatory perimeter and direct action against non-regulated entities within the conglomerate group cannot be taken. - Available information on conglomerate structure is not fully satisfactory, only updated annually. - There is no requirement that the bank or banking group provide a comprehensive and current view of the group-wide risk concentrations and inter-dependencies. - BSP does not conduct a comprehensive resolvability assessment and resolution plans are not developed. - BSP intends to issue guidelines regarding its supervisory approach to ring-fence the bank from actions of parent companies, subsidiaries, and other related companies in matters that could impair safety and soundness. ### Cooperation with PDIC and resolution planning (EC7) - BSP possesses the authority to appoint PDIC as receiver under S. 30 of NCBA where specified grounds exist. - Pursuant to a BSP-PDIC MOA and the PDIC Charter, BSP and PDIC co-ordinate on joint examinations to assess condition and operations of institutions to be placed into receivership; in practice, joint work has been restricted to banks placed in the BRes framework and mainly involves rural banks and smaller banking operations. - While in BRes status, BSP (with engagement of PDIC) will seek to facilitate restructuring, merger or acquisition, although BSP does not possess authority to compel shareholder actions in that regard. - PDIC and BSP meet regularly to review institutions in PCA or BRes status; timing of appointment of PDIC and closure is coordinated through these meetings. - No regular planning has taken place relative to preparing for potential resolution of other firms, especially D-SIBs. - No resolvability analysis nor resolution plan has been developed for D-SIBs. - Bank Secrecy Laws limit PDIC’s access to depositor information on open institutions, except where a determination has been made that the firm is unsafe and unsound. PDIC has not exercised this potential authority to access depositor information and prepare for resolution. - BSP has ongoing working groups with PDIC addressing: - Memorandum of Agreement on Information Exchange including sharing of bank reports and related logistics (for revision); - MOA on Bank Examination (for revision); - Unsafe and/or Unsound Practices and related Enforcement Actions such as Cease and Desist Order (CDO) and Directive to Cease and Desist (DCD). - BSP participates in a Technical Working Group on Harmonization of Merger, Consolidation and Acquisition Evaluation (MCA) involving BSP, PDIC, SEC, CDA and PCC to simplify requirements and shorten processing period for MCA proposals of banks. - Recommendation (excerpted): - BSP is encouraged to continue to work with PDIC to establish effective coordination mechanisms to ensure that, where appropriate grounds exist, firms are placed into resolution in a prompt and timely fashion. ### Assessment and key conclusions (Principle 11) - Assessment: Largely Compliant. - Summary comments: - BSP has an appropriate set of supervisory tools, including ability to revoke banking license, but timeframes for remediation of identified supervisory issues can be extensive. - Banks placed into PCA can linger in PCA status for prolonged periods (years) and remain capital deficient. - PCA framework has not always effectively required early placement into resolution before equity exhaustion. - BSP has generated improvements in prompt and timely remediation of PCA status, but more needs to be done. - Ability to fully protect banks from parent companies and affiliates is impaired due to entities falling outside regulatory perimeter and lack of comprehensive, current group-wide information. - BSP does not conduct comprehensive resolvability assessments and resolution plans are not developed in conjunction with PDIC; this limits BSP’s ability to design effective ring-fence actions that maintain critical economic functions. ### Recommendations (excerpt) - Continue ongoing revisions to the PCA framework and implement policies and procedures to ensure firms placed into PCA status are addressed in a timely fashion and placed into resolution promptly. - Continue to work with PDIC to establish effective coordination mechanisms to ensure timely placement into resolution where appropriate grounds exist. - Develop and implement policies and standards regarding the supervisory approach to ring-fence the bank from actions of parent companies, subsidiaries, and related companies that could impair safety and soundness. Refer to recommendations under CP 1 related to seeking changes to laws or regulations to empower BSP to obtain adequate information and exercise power to fully protect the bank from actions of parent companies and affiliates. - Refer to recommendations under CP 8 related to conduct of resolvability assessments, in conjunction with PDIC. *Source: 1phlea2020003 - 4. Expiration of corporate life.* ### 1. Restriction on operations, such as lending, investment, and active marketing of deposit ### 1. Restriction on operations, such as lending, investment, and active marketing of deposit products. ### Major restriction: operations - 1. Restriction on operations, such as lending, investment, and active marketing of deposit products. ### Major restriction: acquisition of major assets - 2. Restriction on acquisition of major assets. ### Major restriction: dividends - 3. Restriction on cash and property dividend declaration. *Source: 1phlea2020003 - 1. Restriction on operations, such as lending, investment, and active marketing of deposit products.* ### 4. Restriction of activities relative to authorized licenses or privileges granted to the BSFI. ### 4. Restriction of activities relative to authorized licenses or privileges granted to the BSFI ### Restrictions on bank activities and overseas offices - S. 377 of the MORB: limitations and restrictions on a bank’s investment in nonfinancial allied and non-allied undertakings; only universal banks may engage in nonbanking business activities; subsidiaries or affiliates established abroad shall not engage in stock trading activity. - S. 105 of the MORB: requirements to establish a banking office abroad (branches, agencies, representative offices, remittance centers, remittance desk offices and other offices); application for authority to establish an office abroad is subject, inter alia, to certification from the host country that the BSP will be authorized to examine the proposed offices. ### Supervisory consolidation and group supervision (EC7) - The responsible supervisor supervises individual banks on a stand-alone basis in addition to consolidated supervision and understands relationships among group members. - Description and findings: - BSP applies prudential standards at both consolidated level and individual bank level for banking groups. - Supervisors understand operations of entities within the consolidated group and relationships of individual banks to those entities. - Investments in insurance subsidiaries and equity investments in entities outside the consolidated group are deducted from consolidated group capital. - Distribution of capital within different financial entities of a banking group is captured through consolidation according to allocation of risks. - Assessment of Principle 12: Largely Compliant - Comments and deficiencies: - Concentration risk not currently captured adequately because the single borrower limit is not applied at the consolidated group level; proposed revisions to the LE framework will address this. - Majority of BSP designated D-SIBs are incorporated within conglomerate structures that include non-regulated parent companies and affiliates engaged in nonbanking activities; the wider group is not captured within BSP’s regulatory perimeter. - BSP does not have the power to review and examine parent or other affiliate companies of BSP supervised firms. - Recommendations: - Bring financial institutions in conglomerate structures outside the BSP consolidated banking group and regulated by other domestic regulators into the consolidated banking group to enable BSP to capture the risks they pose to the banking group. - Require BSP regulated banks within conglomerate structures to identify all risks arising from companies within their wider group structure in their ICAAP and describe fully internal controls for reporting and managing such risks. ### Home-host relationships (Principle 13) - EC1–EC10 summary findings: - BSP has not established supervisory colleges for the five Philippine banks with overseas operations because overseas operations represent less than 5 percent of respective banks’ total assets. - BSP has signed information sharing arrangements (MOUs/MOAs) with seven regulatory authorities: - China Banking Regulatory Commission (China) on October 18, 2005; - Bank of England (UK) on January 15, 2007 (updated August 3, 2012); - Financial Supervisory Commission (Taiwan Province of China) on January 31, 2007; - Federal Financial Supervisory Agency or BaFin (Germany) on February 9, 2007; - Hong Kong Monetary Authority (Hong Kong SAR) on March 7, 2007; - Bank of Thailand (Thailand) on December 17, 2017; and - Australian Prudential Regulation Authority (Australia New Zealand) on June 4, 2014. - Informal arrangements agreed with Japanese Financial Services Agency and De Nederlandsche Bank; discussions in train with U.S. counterparts for a possible MOU; Austria declined to sign an MOU due to banking secrecy law. - As home supervisor, BSP shares results of examination of foreign offices of domestic banks with host supervisors subject to confidentiality conditions and use restrictions. - BSP maintains an up-to-date contact list of overseas regulators and evidence of two-way informal ad hoc information sharing exists. - MOA with BaFin needs review as responsibility for supervision of the German bank’s branch has passed to the SSM. - BSP has not conducted joint examinations with overseas regulators either as home or host supervisor; as host, BSP meets overseas regulators when they conduct examinations of Philippine-based foreign banks at start and end of examinations. - No formal communication strategies developed with host regulators due to limited scale of overseas operations. - For D-SIBs that are foreign banks in the Philippines: - Philippine operations of parent banks are not material in overall group operations; BSP is not party to CMGs set up by those banks. - Risk mitigants: subject to BSP capital and liquidity regulations; local capital and liquidity required to be held in the Philippines; parent banks required to issue notarized guarantees in compliance with S. 75 of the GBL. - BSP has not engaged with host supervisors on resolution plans for Philippine banking groups due to limited scale of overseas operations. - Foreign banks required to comply with same prudential standards as domestic banks under S. 8 of RA 7721, as amended by RA No. 10641, and S. 77 of RA 8791. - BSP (as home supervisor) has full access to conduct on-site examinations of overseas branches/subsidiaries of Philippine banks; host supervisors are informed in advance of purpose and scope. - BSP does not permit booking operations or shell banks in the Philippines. - BSP has not had cause to take action based on information provided by another supervisor. - Assessment of Principle 13: Compliant - Comment: - MOA with BaFin should be reviewed because supervisory responsibility transferred to the SSM. ### Corporate governance (Principle 14) - Assessment of legal and supervisory framework: - S. 132, 133, 134, 135, 136, 138 and S. 002 of the MORB set out duties/responsibilities of Board, Chair, CEO, officers; required committees; expectations on related party transactions; grounds for disqualification and enforcement tools. - Key governance requirements: - Board duties: define corporate culture and values; approve objectives and strategies; oversee management implementation; appoint key senior management; approve remuneration policy; approve corporate governance framework (S. 132). - Officers’ duties: set tone of good governance; oversee day-to-day management; ensure effective delegation; establish management structure promoting accountability and transparency (S. 134). - Corporate Governance Committees and nomination/appointment processes guided by S. 15 of the GBL and S. 132 of the MORB: Board size requirements (at least five members—two independent—to a maximum of 15; not less than 1/3 independent members); RBs require at least 1 independent director. - S. 133: banks required to have audit, risk oversight and corporate governance committees and related party transaction committee for universal and commercial banks; non-complex banks minimum requirement of an audit committee. - Fit and proper standards and “duty of care” and “duty of loyalty” incorporated into Board member qualifications (S. 132). - Supervisory practices: - BSP on-site examinations assess adequacy of governance policies, Board oversight, nomination and appointment processes, Board member qualifications, compensation/incentives systems and corrective/enforcement actions where deficiencies noted. - BSP imposes enforcement actions including warning letters, reprimands, restriction on compensation and benefits, divestment, suspension, disqualification, removal and monetary penalties/fines (S. 002 of the MORB). - Corporate culture supervision: - BSP created a technical working group on the Supervision of Conduct and Culture to study inclusion of conduct and culture supervision into existing approach. - Assessment of Principle 14: Compliant - Comment: BSP’s Corporate Governance regulations and guidelines are comprehensive; on-site examination framework adequately reviews compliance. ### Risk management process (Principle 15) - Overall assessment: Largely Compliant - Framework, standards and guidance: - Circular No. 971: guidance on Risk Governance; bank should have risk management framework commensurate with risk profile and a risk appetite framework. - Circular No. 969: Risk Oversight Committee oversight requirements. - Circular No. 989: Stress testing guidance; REST referred. - Circular Nos. 981 Liquidity Risk; 900 Operational Risk; 855 Credit Risk; 544 Market Risk; 639 ICAAP; 951 business continuity; 904 recovery plans for D-SIBs. - Key findings by EC: - EC1–EC4: BSP’s risk-based supervisory reviews assess Board and senior management oversight, risk management policies, measurement methodologies, limit structures, MIS and internal controls; on-site examiners review risk reports, stress testing, ICAAP, and data integrity. - EC5 (ICAAP): universal and commercial banks required to prepare ICAAP; BSP reviews adequacy of assumptions during annual on-site exams; Board oversight and stress testing reviewed; BSP has the power (NCBA amendment February 2019) to require banks to hold capital beyond minimums but has not used this power to date. - Observations: ICAAP guidance is dated (2009) and should be revisited; suggest rolling out ICAAP concept to smaller banks suitably; consider off-site review approaches as BSP moves to risk-based on-site supervision. - EC6 (models): BSP assesses model use and compliance with Circular Nos. 989, 971, 981, 900, 855, 544, 639; BSP reviews independent validation/testing of models; only market risk specialists perform regular reviews of market risk and IRB models; draft Model Risk Management (MRM) regulation exposure released for consultation; thrift, rural and cooperative banks to adopt simplified MRM approach. - EC7 (MIS): on-site assessments examine accuracy, integrity, completeness, timeliness, adaptability of risk data aggregation and reporting systems; BSP may require strengthening of MIS via directives. - EC8 (new products): new products and major initiatives assessed during on-site exams via Board minutes, policies, walkthroughs and interviews. - EC9–EC10: assessment of risk management functions, resources, independence, reporting lines; Circular No. 971 requires universal and commercial banks to appoint a CRO; appointment/dismissal/changes to CRO reported to FSS within five days of Board approval. - Draft exposure regulation to require public disclosure of removal of CROs, Chief Compliance Officers and Chief Audit Executives for universal and commercial banks and their subsidiary banks/QBs. - EC11: Circular No. 510 outlines BSP’s standards for credit, market, liquidity, interest rate in the banking book and operational risk. - EC12 (contingency/recovery plans): Circular No. 904 requires D-SIBs to prepare recovery plans embedded in ICAAP; BSP reviews and provides feedback but does not share D-SIB recovery plans with PDIC; recommendation to include PDIC views and separate recovery plans from ICAAP for cross-D-SIB consistency and cumulative assessment. - EC13 (stress testing): Circular No. 989 requires forward-looking stress testing; on-site supervision assesses comprehensiveness of stress testing and incorporation into ICAAP and contingency arrangements. - EC14: BSP assesses internal pricing, performance measurement and new product approval processes during on-site exams. - Key deficiencies and recommendations: - Finalize draft exposures on model risk management, reputational risk and public disclosure of dismissal of CRO, Chief Compliance Officer and Internal Audit executives. - Develop and operationalize BSP’s crisis preparedness for a systemic financial institution, including sharing D-SIB recovery plans with PDIC and strengthening contingency arrangements within the FSCC. - Update guidance on ICAAP to reflect current practices. ### Capital adequacy (Principle 16) - Legal/statutory basis: - S. 34 of the GBL of 2000: statutory requirement for minimum capital ratio; sanctions for non-compliance include limits/prohibitions on distribution of profits, restriction/prohibition on acquisition of major assets and making new investments. - Circular 781: elements of regulatory capital base for universal and commercial banks and their subsidiary banks and QBs. - Minimum capital requirements for universal and commercial banks and their subsidiary banks and QBs: - Common Equity Tier 1 (CET1) must be at least 6.0 percent of risk weighted assets at all times; - Tier 1 capital must be at least 7.5 percent of risk weighted assets at all times; and, - Qualifying capital (Tier 1 Capital plus Tier 2 Capital) must be at least 10.0 percent of risk weighted assets at all times. - Capital Conservation Buffer: 2.5 percent of risk-weighted assets, comprised of CET1 capital. - Minimum requirements are higher than Basel Committee prescriptions; CAR requirement applied on both solo and consolidated bases. - Qualifying components of capital: - Tier 1 capital (going concern): CET1 and Additional Tier 1 (AT1) capital; - Tier 2 capital (gone-concern) as defined in Part II of Circular 781; qualifying capital is sum of elements net of required deductions. - Risk coverage and approaches: - Credit risk: standardized approach only. - Market risk: standardized and internal model approaches permitted; internal models subject to prior BSP approval; currently two banks permitted to compute market risk charges using internal models. - Operational risk: basic indicator approach or standardized approach; standardized approach conditional on explicit BSP approval. - Universal and commercial banks under basic indicator approach use an α equivalent to 15 percent. - Stand-alone thrift, rural and cooperative banks use an α equivalent to 12 percent. - Leverage ratio: - Circular 881 adopts Basel III leverage ratio framework as backstop; universal and commercial banks and their subsidiary banks and QBs required to maintain a minimum leverage ratio of 5.0 percent, which is more conservative than the Basel standard. - Capital regime for stand-alone thrift, rural and cooperative banks: - Simplified Basel II framework called “Basel 1.5” (Circular 688, effective January 1, 2012). - Minimum CAR for stand-alone thrift, rural and cooperative banks is 10 percent. - Qualifying capital consists of Tier 1 capital (core plus hybrid) and Tier 2 capital (supplementary), net of required deductions. - Risk coverage beyond Pillar 1: - Allocation of capital for risks other than credit, market and operational risks is covered by BSP’s Pillar 2 guidelines. *Source: 1phlea2020003 - 4. Restriction of activities relative to authorized licenses or privileges granted to the BSFI (PDF).* ### 1.5 cover capital charges for credit, market and operational risk. There is no requirement for ### 1phlea2020003 - 1.5 cover capital charges for credit, market and operational risk. There is no requirement for ### Overview - The text describes the Philippines’ regulatory framework for bank capital, ongoing amendments to align Basel 1.5 with Basel III, supervisory powers to adjust capital, Pillar 2/ICAAP implementation, D-SIB additional requirements, and rules for the use of internal models for market risk. ### Amendments to Basel 1.5 and minimum capital proposals - Ongoing initiative to amend Basel 1.5 to align with the Basel III reforms on minimum capital requirements to improve the quality and loss capability of regulatory capital of covered banks. - Proposed minimums for covered banks: - Minimum CET1: 6.0 percent - Minimum Tier 1: 7.5 percent - In addition to the minimum 10 percent requirement. - The criteria for CET1, AT1 and Tier 2 capital to be eligible for inclusion as part of qualifying capital will also apply to stand-alone thrift, rural and cooperative banks. - The policy proposal has been exposed to industry for comments and awaits MB approval. ### Minimum capitalization and regulatory instruments - Circular 854 sets out the minimum capitalization of banks; minimum capitalisation varies by type of bank and by number of branches. - BSP can place a bank under PCA when the following thresholds are breached: - Total CAR: below 10.0 - Tier 1 Risk-Based Ratio: below 6.0 - Leverage Ratio (Total Capital/Total Assets): below 5.0 percent - Relevant guidelines for PCA are set out in Circular 523. ### Use of supervisory powers and Pillar 2 / ICAAP - S. 108 of the amended BSP Charter provides the BSP with power to vary individual banks’ capital requirements to reflect their risk profile, but this power has not been used to set individual capital requirements above statutory minimums to date. - BSP has raised risk weightings of certain higher risk assets above international standards via Circulars 468 and 469 (capital charges on securitization and structured products). - BSP introduced Pillar 2 guidelines in Circular 639 applying only to universal and commercial banks: - Require banks to have an ICAAP that takes account of risks not covered by Pillar 1 and sets out future capital plans including contingency plans (e.g., raising additional capital, restricting business, using risk mitigation techniques). - Board and senior management are responsible for ensuring appropriate level and quality of capital commensurate with all material risks. - The ICAAP informs the SRP and CAMELS assessment under SG 2009–21; SRP of the ICAAP does not result in BSP setting individual capital requirements above statutory minimums. - BSP is considering SAFR to replace CAMELS; SAFR aims to be more forward-looking and embed business model and impact analyses into bank risk analysis. - BSP may consider using SAFR to apply capital ratios above the minimum to individual banks to reflect risk profile. - Note: Approval for the implementation of SAFR in 2020 has been agreed subsequent to the BCP assessment. ### D-SIB framework and buffers - BSP requires banks assessed as D-SIBs to meet higher minimum capital requirements to reflect systemic importance. - Circular 856 sets out the regulatory framework for D-SIBs; full implementation took effect on January 1, 2019. - Systemic importance assessment uses an indicator-based measurement approach considering: - (a) size; (b) interconnectedness; (c) substitutability/financial institution infrastructure; and (d) complexity. - Ten indicators related to these categories are used; banks exceeding a cutoff level determined using cluster analysis are classified as D-SIBs; assessment is annual. - Additional capital requirements by bucket: - ‘bucket 1’: additional capital requirement of 1.5 percent - ‘bucket 2’: additional capital requirement of 2.5 percent - All universal banks and commercial banks and their subsidiary banks and QBs must adopt a capital conservation buffer (CCB) of 2.5 percent of risk weighted assets comprised of CET1 capital. - BSP introduced Basel III countercyclical capital buffer (CCyB): - CCyB initially set at 0 percent - MB may increase CCyB to a rate not to exceed 2.5 percent when systemic conditions warrant. ### EC2 — Internationally active banks and comparability with Basel standards - For internationally active banks, definition of capital, risk coverage, method of calculation and thresholds for prescribed requirements are not lower than those in applicable Basel standards. - Philippine banks with limited overseas operations are universal or commercial banks and are subject to the same regulatory framework, which is more conservative than applicable Basel standards. ### EC3 — Supervisor’s power to impose capital charges and prescribed capital calculation - Supervisor has power to impose a specific capital charge and/or limits on all material risk exposures, including risks not adequately transferred or mitigated via transactions (e.g., securitization). - Both on-balance sheet and off-balance sheet risks are included in the calculation of prescribed capital requirements. - Although S. 108 allows varying individual banks’ capital requirements, BSP has not used it to set individual capital above statutory minimums. - BSP has raised risk weightings for certain assets and imposed capital charges (Circulars 468 and 469) to disincentivize excessive holdings of securitization and structured products. - BSP’s Pillar 2 Circular 639 requires ICAAP for universal and commercial banks; ICAAP and SRP inform CAMELS assessment. - BSP’s prescribed calculation includes both on-balance sheet and off-balance sheet risks. ### EC4 — Risk profile and systemic importance reflected in capital requirements - S. 108 gives MB power to prescribe minimum risk-based capital adequacy ratios based on internationally accepted standards and to alter those ratios when necessary. - BSP requires D-SIBs to meet higher minimum capital requirements; D-SIB assessment and buckets described above. - In assessing adequacy of a bank’s capital the supervisor focuses on: - (a) potential loss absorbency of instruments in capital base, - (b) appropriateness of risk weights as proxy for risk profile, - (c) adequacy of provisions and reserves to cover expected losses, - (d) quality of risk management and controls. - Capital requirements may vary from bank to bank to ensure appropriate capital to support risks and systemic impact. ### EC5 — Use of banks’ internal assessments / internal models (market risk) - Annex A of Appendix 42 of the MORB sets out requirements for use of internal models to measure market risk. - BSP has not issued regulations or guidance for use of internal models to measure credit risk. - Foreign-owned banks have been granted permission to use internal models to compute market risk capital requirement, driven off group models approved by home regulators. - BSP grants approval for use of models if minimum requirements are met, generally: - The bank’s risk management system is conceptually sound and is implemented with integrity; - The bank has a sufficient number of staff skilled in use of sophisticated models not only in trading but also in risk control, audit, and if necessary, back office areas; - The bank’s models have a proven track record of reasonable accuracy in measuring risk; and - The bank regularly conducts stress tests as required in existing regulation. - Detailed qualifying standards for internal market risk models are in Annex A of Appendix 42 of the MORB. - Cessation of use and material modifications: - Banks must inform BSP of any material change in models, including methodology or scope of products covered. - Models are subject to periodic (at least annual) on-site assessment; non-compliance may cause BSP to withdraw approval. - Annex A of Circular 360: a bank cannot revert to standardized methodology once it has commenced using internal model approach unless BSP withdraws approval. - Supervisor’s capacity and powers: - BSP’s capacity to evaluate internal risk models is adequate to meet current needs but will require strengthening as banks’ demands increase. - Expertise is developed through formal academic studies and training; consideration suggested for secondment of staff to market risk functions in private banks and recruitment from market to build expertise. - BSP has power to impose conditions on approvals and to withdraw approval if qualifying standards are not met. *Source: 1phlea2020003* ### Annex A of Circular 360 allows the BSP to attach certain conditions to the approval of a ### 1phlea2020003 - Annex A of Circular 360 allows the BSP to attach certain conditions to the approval of a ### Annex A: conditions on approval of internal models for market risk - The BSP can set a multiplication factor on the basis of its assessment of the quality of the bank’s risk management system subject to an absolute minimum of 3. - Banks will be required to add to this factor a “plus” directly related to the ex-post performance of the model (to be determined on a quarterly basis), thereby introducing a built-in positive incentive to maintain the predictive quality of the model. - The plus will range from 0 to 1 based on the number of back-testing exceptions. - Banks using models will be subject to a separate capital charge to cover the specific risk of interest rate-related instruments and equity securities as defined in the standardized approach to the extent that this risk is not incorporated into their models. - For banks using models, the total specific risk charge applied to interest rate-related instruments or to equities should in no case be less than half the specific risk charges calculated according to the standardized methodology. - Transitional arrangements: - Banks may, on a transitional basis, be allowed to use a combination of the standardized approach and the models approach to measure their market risk, provided any such “partial” model shall cover a complete risk category (e.g., interest rate risk or foreign exchange risk). - Banks may not modify the combination of the two approaches they use without justifying to the BSP that they have a good reason for doing so. - The BSP may require a period of initial monitoring and live testing of a bank’s internal model before it is used for supervisory capital purposes. ### Revocation of approval - See (b) above. ### EC6 — supervisor powers on forward-looking capital management - The supervisor has the power to require banks to adopt a forward-looking approach to capital management (including the conduct of appropriate stress testing). - The supervisor has the power to require banks: - (a) to set capital levels and manage available capital in anticipation of possible events or changes in market conditions that could have an adverse effect; and, - (b) to have in place feasible contingency arrangements to maintain or strengthen capital positions in times of stress, as appropriate in the light of the risk profile and systemic importance of the bank. Description and findings re EC6 - Circular 639 requires banks to have an explicit, Board-approved capital plan, which states the bank’s objectives, the time horizon for achieving those objectives, how the banks will comply with future capital requirements and, in broad terms, the capital planning process and the responsibilities for that process. - The capital targets should be consistent with the bank’s risk profile, operating environment, and business plan, but other considerations may be taken into account in deciding how much capital to hold, such as external rating goals, market reputation and strategic goals. - If other considerations are included in the process, banks must be able to show the BSP how they influenced their decisions concerning the amount of capital to hold. - The capital plan should also set out any relevant limits related to capital, and a general contingency plan for dealing with divergences and unexpected events (for example, raising additional capital, restricting business, or using risk mitigation techniques). - Banks should conduct appropriate scenario/stress tests which take into account, for example, the risks specific to the particular stage of the business cycle, and analyze impacts of new legislation/regulation, actions of competitors or other factors. - Supervisors review assumptions underlying the capital plan, stress testing and contingency plans in the SRP of banks’ ICAAPs, and through on-site examinations for those banks not required to submit an ICAAP. - There was evidence of effective reviews being undertaken and of challenge to the capital plans submitted by banks. Assessment of Principle 16 - Largely compliant Comments - An appropriate capital framework is in place for the major banks in the Philippine banking sector, with minimum capital ratios and a leverage ratio set at more conservative levels than applicable Basel standards. - The capital framework for stand-alone rural, thrift and cooperative banks is in the process of being revised to align more closely with Basel III. - The BSP does not directly vary individual banks’ capital requirements to reflect their risk profile but has adjusted certain asset risk weights and has introduced a higher capital regime for D-SIBs. Recommendations - Set individual capital ratios for banks based on their risk profile as part of the SRP process. - Introduce a simplified ICAAP for the rural, thrift and cooperative banks. ### Principle 17 — Credit risk: scope and essential criteria - Principle 17: The supervisor determines that banks have an adequate credit risk management process that takes into account their risk appetite, risk profile and market and macroeconomic conditions. This includes prudent policies and processes to identify, measure, evaluate, monitor, report and control or mitigate credit risk (including counterparty credit risk) on a timely basis. The full credit lifecycle is covered including credit underwriting, credit evaluation, and the ongoing management of the bank’s loan and investment portfolios. EC1 — comprehensive credit risk management processes Description and findings re EC1 - Circular No. 855 outlines BSP’s expectations on bank’s credit risk management policies and processes in: - a) establishing an appropriate credit risk environment; - b) operating under a sound credit granting process; - c) maintaining appropriate credit administration, measurement, monitoring and control processes over credit risk. - Bank’s guidelines must incorporate such factors as the major sources of credit risk exposures posed by assets, liabilities and off-balance sheet exposures. - The Board is responsible for setting the credit risk appetite (including limits) and risk profile as well regularly reviewing management’s ability to operate within these approved limits. - For systemic banks, the Credit Oversight Committee is expected to oversee the credit risk management function in universal and commercial banks. - It is noted that BSP does not have guidance in place to communicate its expectations to banks regarding the use and the approval process for the use of internal credit risk models. EC2 — Board and senior management roles Description and findings re EC2 - Circular No. 855 stipulates that the Board is ultimately responsible for ensuring the bank’s credit risk appetite, limits and overall credit risk management system provide adequate policies, procedures and effective processes and that an independent assessment is periodically performed and reported to the Board or a Board-level committee. - Senior management responsibilities include: - (a) ensuring that credit risk-taking activities are aligned with the Board-approved credit risk strategy; - (b) developing and implementing a bank’s credit policies and procedures; - (c) ensuring that policies are adhered to by all levels of the organization. - BSP’s onsite examination framework annually reviews, on a risk based approach, whether governance and credit process align with Board approved credit risk strategies, policies, risk limits and whether a bank can differentiate risks across individual/group credits and identify deteriorating credit exposures timely. EC3 — policies and processes for credit risk environment Description and findings re EC3 - Circular No. 855 requires and BSP assesses during on-site annual examinations that: - (a) Boards establish sound, comprehensive and clearly defined credit policies, processes and procedures adequate for size, complexity and scope of operations; - (b) approval process for new credits and amendment/renewal/refinancing align with credit policies/pre-approved limits and renewal occurs upon re-establishment of obligor creditworthiness using same criteria; - (c) sound credit-granting criteria and underwriting standards with no undue reliance on external credit assessments; examiners focus on cash flow analysis, sources of income, overall indebtedness, integrity and legal capacity of obligor, and collateral valuation; - (d) assessing the strength of a bank’s MIS including segmentation and reporting of credit risk exposures to the Board, including large exposures, credit risk concentrations and RPTs; - (e) prudent and appropriate credit limits consistent with risk appetite, risk profile and capital strength; - (f) exceptions or excesses in internal limits are monitored and escalated; - (g) reasonableness and effectiveness of credit scoring model parameters is assessed and validation of credit scoring models for pools of loans is undertaken for consistency and meaningful results. - Note: BSP will need to formalize expectations and assessment methodology for credit model risk management; see BCP18 for more detail. EC4 — monitoring total indebtedness Description and findings re EC4 - S. 143 of the MORB requires banks to keep informed of the current financial condition of borrowers and entities. - During on-site examinations, supervisors evaluate adequacy and appropriateness of factors considered and documented in approving credits, including sources of repayments, repayment history and current capacity to repay. EC5 — arm’s length credit decisions Description and findings re EC5 - Circular No. 855 requires banks to enter into all transactions with related parties free of conflicts of interest and on an arm’s length basis. See BCP 20 for more detail. EC6 — Board decision on major credit exposures Description and findings re EC6 - Circular No. 855 outlines expectations regarding underwriting and tracking of large exposures (measured on individual single borrower limit and aggregate connected counterparty limit) and RPTs against Board approved limits. - For larger banks, management’s requirement to report to the Risk Oversight Committee of the Board provides governance for large/risky credit exposures. See BCP 19 and 20 for more detail. EC7 — supervisor access to credit information and officers Description and findings re EC7 - BSP’s on-site annual examination provides full access to information on a bank’s credit and investment portfolios and the opportunity to challenge bank officers involved in credit risk. - Assessors noted BSP’s ability to require banks to make adjustments to certain credit exposures treatment when deficiencies were identified; this was noted in the ROE documents of D-SIBs. EC8 — inclusion of credit exposures in stress testing Description and findings re EC8 - S.143 of the MORB stipulates requirement that banks conduct stress testing and scenario analysis of their credit portfolio, including off-balance sheet exposures at individual and group levels, to assess impacts of market dislocations and changes in economic conditions on profile, earnings and capital. - Circular No. 989 provides guidelines on banks’ conduct of stress testing exercises, which should be linked to a bank’s risk appetite, business strategies, capital and business continuity and liquidity plans and to the bank’s ICAAP. - Stress testing requirements stipulate banks must consider credit risk implications through increases in default probabilities and worsening of credit spreads attributed to economic downturns and significant market shocks. - BSP requires banks to conduct an annual REST for real estate exposures for universal, commercial and thrift banks on a solo and consolidated basis. Assessment of Principle 17 - Largely Compliant Comment - BSP’s current regulations pertaining to banks’ credit risk management policies and processes and its on-site supervision framework appear adequate, except for the lack of guidance in respect of the management/use of internal models to measure credit risk. - Given growth in certain sectors, BSP should establish a concentrated area of technical credit expertise to keep pace with banks’ use of more complicated credit facilities and sophisticated credit models (see BCP 18). - Thematic/horizontal credit reviews across larger banks focusing on credit practices will be important as BSP moves to a more risk based supervisory approach. Recommendations - Develop guidance on the management/use of internal models to measure credit risk. - Establish a concentrated area of credit expertise. - Conduct thematic/horizontal credit reviews across larger FIs focusing on bank’s credit risk management practices. ### Principle 18 — Problem assets, provisions and reserves (EC1–EC2) EC1 — policies and processes for identifying and managing problem assets Description and findings re EC1 - Circular No. 855 sets out expectations for regular review of loans and other credit accommodations at the individual and portfolio level. - Banks are expected to implement an independent and objective credit review process to determine adherence to policies; assess overall asset quality, including classification and adequacy of loan-loss provisioning; determine trends; and identify problems (e.g., risk concentration, risk migration, deficiencies in credit administration and monitoring). - BSP defines regulatory asset classification categories: pass, especially mention, substandard, doubtful and loss; banks may use their own classification systems provided there is clear mapping back to regulatory categories. - S. 49 of the GBL gives the MB powers to determine the specific period for classifying bad debts, fix amount of reserves for bad debts, doubtful accounts or other contingencies and issue regulations on writing off loans. - BSP permits individual and portfolio-based assessment of loans, using credit risk assessment models/methodologies for estimating expected future cash flows including credit risk grading processes combining factors such as loan type, product type, market segment, estimated default probabilities, collateral type, geographical location and past-due status. - Assessors noted the SEC–Oversight Assurance Review body and BSP plan to develop additional regulations and guidance on methodology/modelling of impairment of expected credit losses. EC2 — supervisor determines adequacy of grading, classification and provisioning Description and findings re EC2 - Circular No. 1011 sets out BSP’s expectations for banks to adopt the PFRS which are generally in line with IFRS 9 effective January 1, 2018. - The regulation specifies banks shall recognize adequate and timely allowance for credit losses at all times and adopt principles provided under the Enhanced Standards on Credit Risk Management under S. 178/4178Q/4197N of the MORB/MORNBFI. - BSP has required all banks to adopt PFRS (except smaller less sophisticated entities) and in addition requires all banks to maintain a general allowance of 100bp to ensure a minimum floor for loan loss provisioning is maintained across the banking sector. *Source: 1phlea2020003 - Annex A of Circular 360 allows the BSP to attach certain conditions to the approval of a (PDF).* ### Appendix 15/Q-10 of the MORB/MORNBFI stipulates that where the credit operations that ### 1phlea2020003 - Appendix 15/Q-10 of the MORB/MORNBFI stipulates that where the credit operations that ### Provisioning methodology for less sophisticated credit operations (EC2) - Provisioning differentiates unsecured loans (classification of loss at >90 days) versus secured loans where classification and provisioning vary by collateral type (e.g., “other classified collateral” and “real estate collateral”). - Examples of specified provisioning bands for secured loans: - 91–120 days in arrears: provisioning levels of 25 percent/15 percent for “other classified collateral/secured by real estate”. - 121–360 days: 50 percent/25 percent. - 361 days–5 years: 100 percent/50 percent. - Assessors noted this methodology does not align with PFRS and should be tweaked to provide greater levels of required provisioning after a prolonged “loss classification.” - Banks using this provisioning methodology represent less than 3 percent of the total assets of the banking industry. - BSP on-site supervision: - Reviews bank policies and processes for grading and classifying assets and establishing provisioning levels. - Samples individual problem assets and reviews provisioning models and independent validations. - Relies on internal auditor independent reviews and external auditors where BSP has established sufficient basis. ### Off-balance sheet exposures (EC3) - S. 9 of Attachment 2 of Circular No. 1011 provides rules on recognition and presentation of expected credit losses of off-balance sheet exposures in relation to adoption of PFRS 9 Financial Instruments Impairment. - BSP on-site examiners review banks to ensure classification and provisioning systems take into account off-balance sheet exposures. - Note: Two types of off-balance sheet exposures are recognized: those that can be unilaterally cancelled by the bank and those that cannot. ### Timeliness and realism of provisions and write-offs (EC4) - Circular No. 855 requires banks to have policies ensuring provisions are timely and that estimated credit losses reflect historical net charge-off rates adjusted for trends, conditions and other relevant factors as of the evaluation date, and applied consistently. - BSP regulations do not specify a maximum period for write-off of problem assets (i.e., banks may retain assets so long as 100 percent provisioning is in place) and there is no undue delay in implementing write-offs. - Banks required to write-off problem credits, regardless of amount, against the collective allowance for credit losses or current operations within a reasonable period as soon as problem credits are determined to be worthless as defined in the bank’s written policies. - Problem credits to DOSRI require prior approval of the MB for write-off. - Timeliness of write-offs for smaller banks using the basic methodology should be re-assessed (see EC2). ### Early identification, oversight and workout resources (EC5) - Supervisors determine banks have policies, processes, and organizational resources for: - Early identification of deteriorating assets. - Ongoing oversight of problem assets. - Collecting on past due obligations. - For homogeneous portfolios, classification occurs when payments are contractually in arrears for a minimum number of days (e.g., 30, 60, 90 days). - Supervisors test banks’ treatment of assets to identify material circumvention (rescheduling, refinancing, reclassification). - BSP’s on-site supervision annually assesses bank policies/processes and organizational resources focused on problem loan workout and collection of past due obligations; assesses treatment of classification, aging and provisioning to detect circumvention. ### Reporting, documentation and supervisory access (EC6) - BSP’s FRP requires banks to submit loan data quarterly reflecting asset classification, aging of arrears and provisioning on both solo and consolidated basis. - Supervisors assess adequacy of banks’ documentation during on-site examinations. - BSP requires adequate documentation to support classification and provisioning levels. ### Supervisory powers to require adjustments (EC7) - During on-site examinations BSP flags grading and provisioning issues and materially inadequate or understated provisioning. - BSP powers include requiring banks to: - Adjust classifications of individual assets. - Increase provisioning, reserves or capital. - Impose remedial measures (directives, letters of commitment, sanctions). - Legal basis: S. 49 of the GBL; Circular No. 855. ### Valuation of risk mitigants and collateral (EC8) - Circular No. 855 requires banks to have policies on: - Acceptability of credit mitigants and collateral value limits. - Procedures for assessing physical collateral and availability of financial guarantees. - Processes to ensure enforceability, realizability and marketability (net realizable value taking into account diminished recoverability). - For guarantees, evaluate level of coverage relative to credit quality and guarantor financial/legal capacity; incorporate considerations into loan agreement. ### Criteria for problem assets and reclassification (EC9) - Laws/regulations/supervisor establish criteria for: - (a) Identification of a problem asset (reason to believe all amounts due will not be collected in accordance with contractual terms). - (b) Reclassification as performing (all arrears cleared, loan brought current, timely repayments over a continuous repayment period, continued collection expected). - Circular No. 855: - NPLs, investments, receivables or any financial asset should remain classified until: - (a) sufficient evidence supports full collection is probable and payments of interest/principal are received for at least six (6) months; or - (b) written-off. - Restructured loans are non-performing unless they were performing prior to restructuring; restructured loans may not be reclassified to performing until demonstrated by 6 months performing. - Loans considered non-performing even without missed payments when impaired under accounting standards, classified doubtful or loss, in litigation, or evidence full repayment is unlikely without foreclosure. - All other loans considered non-performing if any principal and/or interest unpaid for more than 90 days from contractual due date, or accrued interests for more than ninety (90) days have been capitalized, refinanced, or delayed by agreement. - BSP would not permit reclassification to performing unless all arrears (both principle and interest) have been paid. ### Board oversight and reporting (EC10) - The supervisor determines the bank’s Board obtains timely and appropriate information on asset portfolio condition, including classification, provisions/reserves and major problem assets; information should include summary results of latest asset review, comparative trends, and measurements of existing or anticipated deterioration. - S. 132 of the MORB requires universal, commercial and thrift banks to have Risk Oversight Committees of the Board responsible for overall risk management and problem asset management framework appropriate to size/complexity. - On-site examiners assess Board/Committee reporting adequacy and proactive Board actions. ### Individual assessment for significant exposures (EC11) - Circular No. 855 requires policies on loan valuation, classification and provisioning to establish and assess ongoing relevance of materiality thresholds for significant credit exposures. - Valuation, classification and provisioning for significant exposures are conducted on an individual item basis; supervisors require appropriate thresholds and regular review of thresholds. ### Sectoral trends, concentrations and system-level assessment (EC12) - BSP uses FRP data, REST uniform stress testing and ICAAP to monitor loan portfolios, NPLs, and adequacy of reserves and impairment provisions. - BSRA submitted quarterly by SPRD to the MB uses FRP, REST and ICAAP data to identify emerging vulnerabilities and potential system impact; highlights supervisory actions and mitigating measures; BRSA recommends policy measures. - Assessors noted BSRA should be shared regularly with FSCC to facilitate inter-agency discussion. - BSP has authority to implement prudential requirements across all banks if macroeconomic conditions warrant. ### Assessment and recommendations for Principle 18 - Assessment of Principle 18: Compliant. - Comments: - BSP’s regulations on early identification and management of problem assets and requirement to maintain adequate provisions/reserves are considered adequate. - Strength noted in BSP’s on-site supervision framework. - BSP should consider changing loan provisioning guidance for less sophisticated banks pertaining to secured loans (adequacy by collateral type and write-off periods). - BSP should ensure expectations on banks’ methodology/modelling of impairment of expected credit losses align with proposed SEC guidance. - Recommendations: - Change loan loss provisioning guidance for less sophisticated banks pertaining to secured loans (collateral valuation, maximum write-off periods). - Align BSP’s expectations on banks’ methodology/modelling of the impairment of expected credit losses with the SEC proposed guidance. --- ### Principle 19 — Concentration risk and large exposure limits (summary and findings) - Objective: Ensure banks have policies/processes to identify, measure, evaluate, monitor, report and control/mitigate concentrations; supervisors set prudential limits to restrict exposures to single counterparties or groups of connected counterparties. - EC1: S. 143 of the MORB requires banks to identify, review, manage and report large exposures and concentration risks; segment portfolios by borrower/counterparties, industry sectors, geographic regions/countries, loan structure, collateral, tenor and investments including off-balance sheet. - Current regulations do not require calculation of a single borrower’s limit on a consolidated basis nor an aggregate large exposure limit for a counterparty/group on both solo and consolidated basis; BSP draft exposure on amendments expected to address this. - EC2: S. 144 of the MORB outlines expectations for MIS; banks expected to render accurate, reliable and timely information enabling identification and monitoring of concentrations; on-site examination annually examines MIS strength and capacity. Smaller banks’ MIS are generally less sophisticated and examined less frequently. - EC3: Annual on-site examination assesses risk management framework, policies on concentrations and large exposures, MIS aggregation capability, reporting, stress testing; supervisors assess Board review of thresholds and management adherence. - EC4: FRP groups transactions by counterparties, currency and geography; Schedule 11—Loans and Receivables collects data by industry, loan type, status and provisioning quarterly. REST collects real estate exposure on connected borrowers but information not necessarily used beyond REST. - S. 174 of the MORB requires disclosure where concentrations exceed 30 percent of total loan portfolio (ongoing policy initiative to extend definition from 30 percent of total loan portfolio or 10 percent of Tier 1 capital). - Annual on-site examination for D-SIBs/top largest 45 banks examines 50 largest exposures in detail. - EC5: S. 361–362 of the MORB define connected counterparties and control; control generally when parent owns more than one half of voting power unless exceptional circumstances; control may exist at one-half or less when other listed powers exist. “Economic Interdependence” defined where counterparties are reliant on each other causing deterioration in creditworthiness if one defaults. BSP may exercise discretion case by case. - EC6: Legal and regulatory limits: - S. 361 defines LE as exposures ≥ 5 percent of the bank’s qualifying capital. - S. 362 limits total loans/credit accommodations/guarantees to any person (SBL) at no time exceed 25 percent of the net worth of the bank. - Possible increases in limit for specified secured transactions: (a) trust receipts securing goods (10 percent); (b) value chain aggregators (25 percent); (c) PPP support (25 percent); (d) loans to finance oil importation (15 percent). - Other prudential limits: wholesale lending of government banks (35 percent), project finance exposures (25 percent of net worth of lending book). - Current regulations do not stipulate calculating single borrower limit on a consolidated basis or aggregate LE limit for counterparty/group on solo and consolidated basis. - BSP expects banks to operate below SBL and aggregate exposure limits; expected to contact BSP if expecting breach; violations subject to monetary penalties and sanctions. - BSP exposure draft proposes main changes: 1. Revise LE definition: tighten capital base from qualifying capital to Tier1 capital, change ratio from 5 percent to 10 percent, capture both solo and consolidated basis. 2. Adopt prudential limit on LEs of 25 percent of Tier 1 capital. 3. Expand criteria for economic interdependence. 4. Methodology for measuring and aggregating exposures including on/off-balance sheet and eligible credit risk mitigation techniques. 5. More comprehensive limit covering trading book, derivatives, all traditional off-balance sheet assets, repo-style transactions, securitization-related investments and other structures. 6. Reporting of large exposures both solo and consolidated. - EC7: BSP requires banks to include concentration impacts in stress testing; ICAAP and SRP provide insight; banks required to conduct stress testing against large exposures; REST annual assessment of real estate exposures led to macroprudential measures setting prudential limits for real estate exposures at 6 percent of CET1 and 10 percent of risk-based CAR (solo and consolidated). - Assessment of Principle 19: Largely Compliant. - Comments: Weaknesses include lack of consolidated basis SBL calculation, capital base definition not Basel-compliant, need for clearer economic interdependence identification. Proposed draft exposure amendments expected to address these. - Recommendation: Update regulations to ensure limits calculated both on solo and consolidated basis. ### Principle 20 — Transactions with related parties (summary and findings) - Objective: Prevent abuses and conflicts of interest in related party transactions (RPTs); require arm’s length terms, monitoring, mitigation, and standard write-off policies. - EC1: Circular 895 (S. 131 of the MORB) defines related parties to include subsidiaries, affiliates, parties the bank exerts control over or that exert control over the bank, directors, officers, stockholders and related interests (DOSRI), close family members, corresponding persons in affiliated companies, and other persons/juridical entities whose interests may pose potential conflict. BSP can exercise discretion case by case. - BSP’s definition broader than Basel suggested definition; adopts more stringent control threshold of 20 percent ownership (vs. 50 percent in Basel). Threshold subject to review considering recent amendment setting significant ownership at 10 percent. - EC2: Circular No. 895 expects RPTs to be conducted on arm’s length terms and banks’ policies to ensure transactions are not on more favorable economic terms compared to similar transactions with non-related parties. - EC3: Circular No. 895 requires Board approval for material RPTs, disclosure of interests by Board/members/management, and abstention by conflicted directors/officers. - EC4: On-site examination annually assesses bank policies/processes to prevent persons benefiting from transactions from being part of granting/managing RPTs; assesses pricing mechanisms and control functions. - EC5: Circular No. 895 requires internal limits for individual and aggregate exposures; Circular No. 914 outlines RPT/loans to be deducted from net worth and CET1 including unsecured loans to directors, officers, stockholders; total unsecured loans to subsidiaries; RPTs not at arm’s length. S. 344, S. 131 and related sections stipulate ceiling limits for DOSRI, subsidiaries/affiliates and related parties. - EC6: On-site framework assesses Board-approved RPT policies, RPT Committee evaluation strength, MIS to identify/aggregate/monitor RPTs, materiality thresholds, whistleblowing mechanisms and remedies for abusive RPTs. Limits in S. 361 and 363 pertaining to large exposures and connected borrowers apply to RPTs. - EC7: Circular No. 895 provides guidelines on disclosure and regulatory reporting for RPTs; banks must disclose RPT management policies in Annual Report if applicable; submit reports to BSP on material exposures to related parties including material RPTs of non-bank financial subsidiaries/affiliates. Off-site surveillance reviews these reports; on-site examines top 50 large exposures in greater detail. BSP receives annual mapping of D-SIBs and conglomerates group structures. - Assessment of Principle 20: Compliant. - Comments: BSP’s broader definition considered adequate; on-site examination team effectively challenges policies/procedures. As BSP adopts more risk-based on-site approach, off-site surveillance and RPT data assessment will be key. ### Principle 21 — Country and transfer risks (summary and findings) - Objective: Banks should have adequate policies/processes to manage country and transfer risks in international lending/investment. - EC1: S. 143 of the MORB requires banks to manage country and transfer risk; banks expected to have internal capacity without undue reliance on external ratings. Circulars No. 855 and 971 outline expectations consistent with risk profile, systemic importance and market/macro conditions. - Existing regulations focused on lending side; BSP draft circular on Risk Management Guidelines on Investment Activities of banks (released for consultation) provides additional guidance on investment activities. - Cross-border exposures of Philippine banks are limited; on-site framework includes annual assessment of policies/procedures and investment process. - EC2: Circular 971 requires Board-approved strategies/policies with Board oversight; on-site framework reviews Board/senior management roles and adherence to policies. - EC3: S. 142 of the MORB requires MIS to provide dynamic, comprehensive and accurate risk reporting at disaggregated and aggregated levels for cross-border exposures; on-site examines adequacy of risk management, internal controls and information systems. - EC4: S. 143 requires banks to consider country risk analysis when calculating credit classification and allowances and developing expected loss models; on-site framework assesses adequacy of classification and provisioning for country exposures; BSP relies on external auditors for third-party judgement on provisioning adequacy. - EC5: Circular 989 requires stress testing scenarios to include relevant risk factors including concentration risk by individuals, related groups, industries, market sectors, countries or regions; stress tests at consolidated and material entity levels. - EC6: Circular 850 (report on cross-border financial positions) measures cross-border claims/liabilities; FRP collects foreign currency denominated claims/liabilities. - Assessment of Principle 21: Compliant. - Comments: Off-site surveillance and on-site examination framework considered adequate. BSP needs to finalize draft Circular on Risk Management Guidelines on Investment Activities to capture investment side of country and transfer risks. - Recommendation: Finalize draft Circular on Risk Management Guidelines on Investment Activities of banks. ### Principle 22 — Market risk (introductory findings) - EC1: S. 144 and Appendix 70 of the MORB set out principles for adequacy and effectiveness of market risk management, level and trend of market risk exposures, and adequacy of capital relative to exposures. - Banks required to define individuals/committees responsible for market risk and ensure separation of duties in key elements to avoid conflicts of interest. *Italic: Source — Excerpt from 1phlea2020003 (Appendix 15/Q-10 of the MORB/MORNBFI) contained in the supplied IMF PDF content.* ### Appendix 42 of the MORB outlines the guidelines on the incorporation of market risk in the ### 1phlea2020003 - Appendix 42 of the MORB outlines the guidelines on the incorporation of market risk in the ### Market risk coverage, materiality, and instruments - Two material market risks run by Philippine banks: IRRBB and foreign exchange (FX) risk. - Equity risk, credit spreads, and commodity risk are not material in the banking sector. - Products used by banks for proprietary trading and hedging: primarily forwards, swaps and options (non-complex). - Two foreign owned banks have approval to use internal models to calculate their market risk capital requirement; all other banks use the standardized approach for market risk. - Stand-alone thrift, rural and cooperative banks are subject to a simplified Basel 1.5 capital regime. ### Regulatory framework and key MORB provisions - Appendix 42 of the MORB: sets out capital requirements for universal and commercial banks’ market risk exposures; broadly consistent with BCBS “Amendment to the Capital Accord to Incorporate Market Risks” (January 1996). - Appendix 70 of the MORB: guidance on market risk measurement methods and market risk management requirements (management information systems, limits, stress testing, internal controls, valuation integrity). - Appendix 59 of the MORB: requires banks to submit documentation describing systems and controls for the prudent valuation of positions in the trading book, including valuation methodologies. - S. 613 of the MORB: governs derivative activities. - S. 144 and Appendix 70: guidance on definition, sources and measurement of IRRBB. - Circular No.1021: amended guidelines on marking to market of financial instruments, aligning with PFRS 13 on fair value measurement. - Circular No. 989: guidelines on the conduct of stress testing exercises of universal and commercial banks. ### Supervisory approach, governance and examinations - BSP has a dedicated market risk team to evaluate bank sensitivity to market risk as part of the CAMELS process; assessment covers qualitative and quantitative data and management’s ability to identify, monitor, measure and control market risk. - Market risk examination procedures include: - review of board and senior management minutes; - evaluation of market risk management policies, procedures, and compliance; - assessment of market risk measurement methodologies, limit structures, monitoring, and management information systems; - review of internal controls and audit. - Market risk reviews are generally part of regular examinations; market risk team may conduct ad hoc reviews between annual examinations when concerns arise. - Market risk team is described as adequately resourced in numbers and expertise given current non-complex instruments; BSP should continue to ensure expertise as banks introduce more complex traded instruments. - Examiners enforce segregation between trading and banking books pending clarification to prevent capital arbitrage. ### Valuation, prudent valuation and model validation - Appendix 70, S. 613 and Appendix 42: require banks to adopt appropriate valuation procedures and mark-to-market model methodology. - Circular No.1021: aligned marking to market guidance with PFRS 13. - BSP has not formally adopted the prudent valuation framework; Appendix 59 requires documentation of systems and controls for prudent valuation and these are reviewed during examinations. - BSP proposing revised risk management guidelines on investment activities to update fair valuation framework, emphasize timely valuation and validation of models prior to use (policy proposal currently under exposure). ### Capital treatment and model approaches - Banks may use either the standardized approach or the internal models approach for calculation of capital charges for specific and general market risks. - Regulatory standards on market risk capital under review following Basel Committee’s publication of the Minimum Capital Requirements for Market Risk standard (January 2016). - No specific regulation on valuation adjustments for fair value uncertainty; fair valuation methodologies and any adjustments under stress are reviewed during examinations and assessed for impact on capital positions. ### Stress testing requirements - Circular No. 989: mandates stress testing for universal and commercial banks; rural, thrift and cooperative banks with simple operations are not required to conduct market risk stress tests. - Appendix 70: requires universal and commercial banks to supplement market risk measurement models with stress tests; possible stress scenarios specified (abrupt changes in interest rates, changes in relationships among key market rates, changes in slope/shape of yield curve, changes in liquidity, changes in volatility). - Market risk experts review banks’ stress testing policies and procedures as part of ICAAP supervisory review and on-site examinations; evidence shows effective supervisory challenge on stress testing methodologies and assumptions. ### Findings against the Essential Criteria (EC) - EC1: Framework requires banks to have market risk measurement systems capturing all material sources and to ensure timely, accurate MIS, documented assumptions, stress tests, and independent reviews. - EC2: Supervisor assesses Board and senior management approval/oversight of market risk strategy and integration with overall risk management through on-site examinations; evidence of effective supervisory challenge present. - EC3: Requirements for effective MIS, appropriate limits, exception tracking, model controls, and allocation to trading book are set out in Appendix 70; ambiguity exists around boundary between trading and banking books—BSP proposing updates to clarify. - EC4: Requirements for frequent revaluation, timely transaction capture, consistent/prudent valuation practices, independent verification of market data, and independent model validation are in Appendix 70, S.613 and Appendix 42; Circular No.1021 updated marking to market guidance. - EC5: Capital requirements set out in Appendix 42; banks allowed standardized or internal models approaches; valuation adjustments for uncertainties are assessed during examinations though no specific regulation exists. - EC6: Supervisor requires inclusion of market risk in stress testing programs; Circular No. 989 and Appendix 70 set supervisory expectations and reporting/enforcement requirements. ### Assessment and recommendation - Assessment of Principle 22: Largely Compliant. - Comments: - Regulatory framework and supervisory practice appropriate for current complexity of market risk run by banks. - BSP adequately resourced in staff numbers and expertise to supervise market risk functions effectively. - Lack of clarity over allocation of assets between trading and banking books creates capital arbitrage opportunities; proposed updates expected to address ambiguity and clarify governance and capital treatment of market risk. - Recommendation: - Issue the proposals on a revised market risk framework and on risk management guidelines on investment activities. *Source: Appendix 42 and related sections of the MORB as described in the provided content.* ### Appendix 70 of the MORB sets out the requirements for appropriate Board and senior ### 1phlea2020003 - Appendix 70 of the MORB sets out the requirements for appropriate Board and senior ### Appendix 70: Board and senior management oversight over IRRBB - Appendix 70 of the MORB sets out the requirements for appropriate Board and senior management oversight over a bank’s risk management system and the roles and responsibilities of the Board and senior management in managing interest rate risk exposures. - The on-site examination process conducted by market risk experts includes an assessment of the adequacy and effectiveness of Board and senior management oversight on IRRBB. Commentary in examination reports confirmed effective challenge in this area. EC3 ### EC3 — Supervisor expectations for a controlled interest rate risk environment - The supervisor determines that banks’ policies and processes establish an appropriate and properly controlled interest rate risk environment including: - (a) comprehensive and appropriate interest rate risk measurement systems; - (b) regular review, and independent (internal or external) validation, of any models used by the functions tasked with managing interest rate risk (including review of key model assumptions); - (c) appropriate limits, approved by the banks’ Boards and senior management, that reflect the banks’ risk appetite, risk profile and capital strength, and are understood by, and regularly communicated to, relevant staff; - (d) effective exception tracking and reporting processes which ensure prompt action at the appropriate level of the banks’ senior management or Boards where necessary; and, - (e) effective information systems for accurate and timely identification, aggregation, monitoring and reporting of interest rate risk exposure to the banks’ Boards and senior management. - Description and findings re EC3 (see EC1 and Appendix 70 requirements): - a) Establish appropriate risk measurement systems that capture all material sources of risk associated with its assets, liabilities and off-balance sheet positions. - b) Ensure that models are validated by individuals who are neither directly involved in the development process nor responsible for providing inputs to the model, prior to the use of the said model. Such model validation includes the development of empirical support for the model’s assumptions. A periodic review of methodologies and assumptions is also required. - c) Establish appropriate risk limits, duly approved by the Board, to maintain the bank’s exposure within set tolerances over a range of possible changes in interest rates. In setting limits, the Board and senior management are expected to consider the nature of the bank’s strategies and activities, past performance and management skills, as well as the level of the bank’s earnings and capital to ensure that both are sufficient to absorb losses equal to the set limits. - d) Ensure that positions that exceed pre-determined levels receive prompt management action. Limit exceptions are expected to be communicated to management without delay. - Policies should include how management will be informed and what action should be taken by management in such cases. The circumstances leading to a tolerance of breaches are also expected to be clearly described. - e) Establish an accurate, informative, and timely management information system. Reports detailing the bank’s interest rate risk exposure are expected to be review by the Board on a regular basis. - Supervisory examination activities and planned enhancements: - Supervisors assess banks’ gap reports, use of interest rate scenarios and simulation models, and metrics used to capture IRRBB from both the earnings and economic value perspectives. - Stress test methodologies and results are reviewed and the adequacy of management of model risk is ascertained. - The exposure draft of updated guidelines on IRRBB will incorporate more detailed model risk governance principles, as well as an explicit requirement to adopt sound and reasonable assumptions on the repricing of products with behavioral optionalities in the computation of risk metrics. ### EC4 — Stress testing requirements for IRRBB - The supervisor requires banks to include appropriate scenarios into their stress testing programs to measure their vulnerability to loss under adverse interest rate movements. - Description and findings re EC4: - Appendix 70 of the MORB requires universal and commercial banks to supplement their interest rate risk measurement models with stress tests showing how a portfolio or the balance sheet might perform during extreme events or in highly volatile markets. - The guidelines specify that the design of stress tests should be tailored to the specific risk characteristics of the bank and consider “worst case” scenarios in addition to more probable events. - Circular 989 sets out the general requirements for universal and commercial banks to conduct stress tests. In respect of IRRBB, it specifically expects banks to consider risks arising from parallel or non-parallel shifts in the yield curve, and the increase in basis risk (i.e., changes in relationships between key market rates). - Banks are expected to adopt systems that are capable of estimating changes to net interest income under a variety of interest rate scenarios. - For example, non-complex banks with traditional business lines and balance sheets may limit their simulations to a single + 100 basis point parallel rate shock. - Banks that hold significant levels of derivatives and structured products relative to capital are required to incorporate more severe rate movements (e.g., + 100, 200 and 300 basis points) to determine what happens if strike prices are breached or “events” are triggered. - The market risk experts evaluate the adequacy of universal and commercial banks’ stress testing programs during on-site examinations. The examination involves an assessment of whether the stress test involves plausible forward-looking scenarios and takes into account scenarios along a spectrum of severity levels. There were numerous examples of constructive challenge by supervisors on stress testing issues in bank examination reports. - There are currently no requirements for rural, thrift or cooperative banks to conduct stress tests of their interest rate risk, but the exposure draft that will update existing IRRBB guidelines, includes such a requirement. - The exposure draft will also introduce further enhancements to banks’ stress testing exercises, covering: - the determination of currency-specific interest rate movements; - the setting of assumptions on how rates shall change under identified stress scenarios; and - the adoption of forward-looking scenarios that incorporate changes in portfolio composition due to internal and external factors, new products, new market information and emerging risks. ### Assessment of Principle 23 and recommendation - Assessment of Principle 23: Largely Compliant - Comments: - The legal and supervisory framework for ensuring banks have adequate systems that identify, measure, evaluate, monitor, report and control IRRBB is appropriate for the complexity of the risk being run by such banks. - The framework does not, however, set IRR stress test requirements for smaller banks. - A revised set of IRRBB guidelines has been exposed to industry for comment which, when implemented, will introduce further enhancements to banks’ stress testing exercises and, more generally, align the BSP framework with the applicable Basel standard. - Recommendation: - Implement the proposals on a revised set of IRRBB guidelines. ### Principle 24 — Liquidity risk (EC1 excerpt) - Principle 24 summary: Liquidity risk. The supervisor sets prudent and appropriate liquidity requirements (which can include either quantitative or qualitative requirements or both) for banks that reflect the liquidity needs of the bank. The supervisor determines that banks have a strategy that enables prudent management of liquidity risk and compliance with liquidity requirements. The strategy takes into account the bank’s risk profile as well as market and macroeconomic conditions and includes prudent policies and processes, consistent with the bank’s risk appetite, to identify, measure, evaluate, monitor, report and control or mitigate liquidity risk over an appropriate set of time horizons. At least for internationally active banks, liquidity requirements are not lower than the applicable Basel standards. - EC1 — Description and findings re EC1: - The BSP has set three liquidity requirements for its banks. Universal and commercial banks and their subsidiary banks and QBs are required to comply with LCR and NSFR frameworks, and stand-alone rural, thrift and cooperative banks are required to meet an MLR framework. - Liquidity Coverage Ratio *Source: 1phlea2020003 - Appendix 70 of the MORB sets out the requirements for appropriate Board and senior (PDF chapter/section).* ### Appendix 72 of the MORB sets out the requirements and components of the numerator ### Appendix 72 of the MORB sets out the requirements and components of the numerator ### Liquidity Coverage Ratio (LCR) framework and implementation - Calculation of the LCR is based on the Basel III framework; the BSP has exercised discretions in respect of deposit run-off rates that are more conservative than the Basel standard. - The framework took effect from January 1, 2019; universal and commercial banks have been required to maintain an LCR of 100 percent on a daily basis since that date. - Banks are required to submit monthly and quarterly calculations of their LCR to demonstrate compliance with the 100 percent minimum requirement. - Information related to a bank’s LCR is required to be disclosed in the bank’s quarterly published balance sheet, on the bank’s website, its other published financial reports or publicly available regulatory reports. - Upon receipt of the monthly LCR report, off-site supervisors assess any shortfall in a bank’s LCR; assessment may result in heightened supervisory monitoring and, if prolonged or materially non-compliant, require remedial action within a committed timeline with possible sanctions subject to MB approval. ### LCR monitoring, maturity mismatch reporting, and gaps - Banks submit a contractual maturity mismatch report on a monthly basis in line with BCBS recommendations. - The BCBS LCR standard suggests time buckets of overnight, 7 days, 14 days and one month out to 5 years. - The BSP does not require banks to report contractual maturity mismatches in the shorter time buckets from overnight out to 14 days; reporting therefore does not capture potential daily liquidity mismatches in the period out to one month. - Recommendation (from source): The BSP should review its current reporting requirements and introduce additional time buckets, including overnight, in its contractual maturity mismatch report to align with the applicable Basel standard. ### Net Stable Funding Ratio (NSFR) - Circular 1007 sets out the requirements of the NSFR. - The NSFR applies to all universal and commercial banks and their subsidiary banks and QBs, on both a solo and consolidated basis. - The NSFR took effect from 1 January 2019; covered banks are required to maintain at least 100 percent NSFR on a daily basis. - The BSP monitors compliance through quarterly reports; a shortfall entails heightened supervisory monitoring and may trigger remedial action within a committed timeline and possibly more stringent enforcement actions if unresolved. ### Minimum Liquidity Ratio (MLR) - Circular 996 sets out the MLR requirements for stand-alone rural, thrift and cooperative banks. - The MLR objective is to promote short-term resilience to liquidity shocks of the covered banks. - The MLR is expressed as a percentage of a bank’s eligible stock of liquid assets to its total qualifying liabilities. - The MLR definition of stock of liquid assets is not consistent with the definition of HQLA in the LCR; liquid assets must be readily liquefiable and free from encumbrances. - Qualifying liabilities include irrevocable obligations under off-balance sheet items (e.g., guarantees, committed credit lines). - Banks are required to maintain an MLR of 20 percent on a daily basis, absent a period of financial stress. - The 20 percent ratio was based on empirical historical loss/bank failure data. - The MLR came into effect on 1 January 2019. - Covered banks must submit a monthly MLR compliance report on a solo basis in peso-equivalent terms using a prescribed form within 15 business days after the end of the reference period. - A shortfall will, at a minimum, entail heightened supervisory monitoring. ### Other minimum liquidity requirements and foreign currency limits - Circular 996 and S. 73 of the Manual of Regulations on Foreign Exchange Transactions (MORFXT) require depository banks under the foreign currency deposit and expanded foreign currency deposit systems (FCDU/EFCDU) to maintain at all times a 100 percent cover for their foreign currency liabilities, except for USD-denominated repurchase agreements with the BSP. - S. 75 of the MORFXT prescribes that FCDUs/EFCDUs of universal and commercial banks as well as FCDUs of rural, thrift and cooperative banks maintain the foreign currency cover in any foreign currency acceptable with the BSP. - The MORFXT limits the allowable open FX position of banks to USD 50 million or its equivalent, or 20 percent of unimpaired capital, whichever is the lower; this limit includes off-balance sheet items such as foreign currency forwards. - Banks are required to regularly submit reports demonstrating compliance with the MORFXT limit. ### Supervisory assessment, liquidity management guidance, and intraday reporting - Supervisors ensure compliance with liquidity requirements and assess adequacy of a bank’s liquidity and funding profile under the CAMELS framework during on-site examinations. - Circular 981 sets out liquidity risk management guidelines: liquidity risk management frameworks should reflect the size, nature and complexity of activities; identify, measure, monitor and control exposures timely and comprehensively; and maintain a structurally sound funding and liquidity profile. - Guidelines require banks to maintain liquidity to meet expected and unexpected cash flows and collateral needs, consider intraday liquidity and currencies of significant activity, have systems and controls for intragroup liquidity oversight, and ensure capacity to withstand stress events of varying severities. - Guidelines on intraday liquidity reporting have been issued but reporting requirements have yet to be implemented; under these guidelines universal and commercial banks are required to submit monthly reports on intraday liquidity to the BSP to monitor intraday positions, sources of intraday liquidity, and ability to meet payments under normal and stressed conditions. ### Funding strategy, contingency planning, and stress testing - Circular 981 requires senior management to develop a funding strategy that provides effective diversification of funding sources and maturities; diversification targets should be part of medium to long-term funding plans and aligned with budgeting and business planning. - Banks must regularly test contingency funding plans (CFPs) by verifying ability to sell a certain volume of assets and establish/maintain relationships with liability holders. - CFPs must be formally articulated, documented, include crisis management roles and communication plans (including communications with the BSP), reflect relevance of central bank lending facility as secondary source, and be regularly tested. - Circular 981 requires universal and commercial banks to conduct stress tests regularly for a variety of short-term and protracted scenarios, at minimum considering: (1) an institution-specific crisis scenario, (2) a market-wide crisis scenario, and (3) a combination of both; scenarios are subject to regular review and approval by the Board and senior management. - Results of stress tests are expected to be integrated into asset and liability management, liquidity risk management, strategic business planning, internal liquidity risk limits, and CFPs. ### Foreign currency liquidity transformation and monitoring by currency - Circular 981 clarifies that liquidity risk management principles apply to foreign currencies in which a bank has significant exposure (a currency is "significant" if aggregate liabilities denominated in that currency amount to 5 percent or more of a bank’s total liabilities). - Banks must formulate liquidity strategies and policies for significant currencies, assess aggregate foreign currency liquidity needs under normal and stressed conditions, control currency mismatches, assess convertibility and market access, and set limits on funding gaps for each significant currency and in aggregate. - LCR, MLR, and NSFR regulations require banks to measure and monitor applicable liquidity ratios by significant currency. - Supervisors assess FX liquidity management during on-site examinations and monitor foreign currency liquidity needs through monthly significant currency LCR reports. ### Supervisory findings and assessment of Principle 24 - Assessment of Principle 24: Largely compliant. - Key findings: - An appropriate regulatory framework is in place to ensure minimum requirements for liquidity and funding for universal and commercial banks. - Cashflow mismatch monitoring tools for the LCR should be reviewed and aligned more closely with applicable Basel standards. - The BSP has issued guidelines on intraday liquidity monitoring but has yet to introduce an intraday liquidity reporting regime. - The LCR, MLR and NSFR frameworks are not risk-based; minimum requirements apply uniformly and are not tailored to individual banks’ liquidity risk profiles. - The BSP does not require universal and commercial banks to produce an ILAAP and does not factor liquidity risks not captured in the LCR calculation (e.g., intraday liquidity risk) into banks’ liquidity requirements. - Recommendations: - Review the monitoring tools for the LCR to align them more closely with applicable Basel standards, including introduction of a more granular cashflow mismatch report. - Introduce an ILAAP framework to enable the BSP to set individual liquidity and funding requirements for banks above the statutory minimum to reflect the particular liquidity and funding profiles of those banks. - Implement an intraday liquidity reporting regime. *Source: Appendix 72 of the MORB sets out the requirements and components of the numerator (excerpt).* ### Appendix 39 of S. 164 of the MORB states that financial statements filed with the BSP are ### Appendix 39 of S. 164 of the MORB states that financial statements filed with the BSP are ### Responsibilities for financial reporting and supervisory assessment (EC1, EC2) - Appendix 39 of S. 164 of the MORB states that financial statements filed with the BSP are primarily the responsibility of the management of the reporting institution. - S. 172 of the MORB requires banks to adopt PFRS and PAS. - S. 162 of the MORB requires banks to maintain adequate financial policies, records and processes, and minimum internal controls including independent balancing, separation of recording and physical handling of transactions, joint custody over important records and resources, and dual control over certain accounts/transactions. - Circular 963 requires the Board and senior management to implement an effective reporting system to generate complete, accurate, consistent, reliable and timely reports; banks must ensure IT systems provide an effective reporting system appropriate for their size and complexity. - Integrity of a bank’s financial data and reporting systems is assessed during on-site examination through validation and verification of reports against supporting documents/schedules, analytical review or trending analysis, reasonableness tests of balances, and review of the process on preparation of bank reports. - S. 174 of the MORB requires a bank to undertake an annual financial audit conducted in line with PAS on its financial statements by an external auditor acceptable to the BSP, not later than 30 calendar days after the close of its calendar/fiscal year. The report should be submitted to the Board and to the BSP not later than 120 calendar days after the close of its calendar/fiscal year. - Annual audit report should be accompanied by: - Certification by the external auditor on: (1) dates of start and termination of audit; (2) date of submission of the financial audit report and certification under oath stating that no material weakness or breach in the internal control and risk management systems was noted in the course of the audit of the bank to the Board of directors or country head; and (3) the absence of any direct or indirect financial interest and other circumstances that may impair the independence of the external auditor; - A Reconciliation Statement between the Annual Financial Statement and the balance sheet and income statement including copies of adjusting entries on the reconciling items; and, - Other information that may be required by the BSP. ### Accounting and valuation framework (EC3) - A 2017 ROSC concluded that the Philippines has a comprehensive accounting and auditing framework; national accounting and auditing standards are substantially equivalent to international principles. - Appendix 27 under S. 172 of the MORB aligns local financial accounting standards with international accounting standards. - Circular 1021 sets guidelines on marking-to-market of financial instruments to align regulations with PFRS 13 on Fair Value Measurement. - Circular 1011 provides guidelines on adoption of PFRS 9 on expected credit losses; banks should adopt PFRS in recording transactions and in preparation of financial statements and reports to the BSP. Where differences exist between BSP regulations and PFRS, the option or limit prescribed by the BSP should be adopted by banks. - BSP maintained a 1.0 percent minimum provision on all on-balance sheet loans as a regulatory backstop when adopting PFRS 9. - Banks are required to provide an annual reconciliation to the BSP of any differences between their financial accounting and regulatory reporting frameworks. - Memorandum M-2014-011 requires external auditors to evaluate methodologies, assumptions and valuation practices, including provisioning for loan losses, for appropriateness and consistency with the applicable financial reporting framework and to review documentation of significant differences between valuations used for financial reporting and regulatory purposes. ### Audit standards, scope and quality assurance (EC4, EC5) - Auditing Assurance Standards Council (AASC) authorizes and promulgates generally accepted auditing standards; AASC policy is to make International Standards and Practice Statements issued by the IAASB the applicable standards and practice statements in the Philippines. - Specific standards applicable to external audits include: - Philippine Standards on Auditing (PSAs); and - Philippine Standards on Review Engagement. - PSA 300 requires auditors to plan including: nature, timing and extent of planned risk assessment procedures (per PSA 315); performance of risk assessment procedures (inquiries, analytical procedures, observation and inspection); nature, timing and extent of planned further audit procedures (per PSA 330); and other planned audit procedures required for compliance with PSAs. - PSA 320 requires application of the concept of materiality in planning and performing an audit; judgments about the size of misstatements considered material provide a basis for determining nature, timing and extent of risk assessment and further audit procedures. - S. 174 of the MORB requires audits to be conducted in accordance with established quality assurance procedures covering: 1. asset quality, 2. adequacy of risk-based capital, 3. risk management systems, and, 4. corporate governance framework of banks/quasi-banks. - Memorandum 2014-011 cites key audit areas meriting special audit consideration, including impairment and loan loss provisioning, financial instruments measured at fair value, liabilities, related party transactions and disclosures. - Appendix 39 requires the external auditor’s work program to be submitted to the BSP evidencing compliance with BSP rules and regulations, including: 1. capital adequacy ratio, as currently prescribed by the BSP; 2. AMLA framework; 3. risk management system, particularly liquidity and market risks; and, 4. loans and other risk assets review and classification, as currently prescribed by BSP rules and regulations. - Banks’ annual financial reports are reviewed by supervisors in accordance with SG Nos. 2008-019 and 2009-27; BSP evaluates the quality and coverage of a bank’s external audit. ### Selection, accreditation, independence and rotation of external auditors (EC6, EC7) - S. 164 and Appendix 39 of the MORB govern selection and delisting by the BSP of external auditors and auditing firms. - Qualification requirements for individual external auditor and auditing firm include (among others): a. Accredited by the Board of Accountancy; b. At least five years of audit experience; c. Independent; and, d. Must have established adequate quality assurance procedures to ensure full compliance with accounting and regulatory requirements. - Grounds for delisting and suspension include: a. Failure to submit required reports; b. Continuous conduct of audit despite loss of independence; c. Willful misrepresentation to the BSP; d. Commission of an act that is discreditable to the profession as determined by the Board of Auditors, after due notice and hearing; e. Commission of a crime that is declared by a competent court involving moral turpitude, fraud or liability for violation of laws, rules and regulations; f. Refusal, for no valid reason, to submit documents in connection with an ongoing investigation; g. Gross negligence in the conduct of audit which would result to non-compliance with generally accepted auditing standards or issuance of an unqualified opinion that is not supported by full compliance by the auditee of generally accepted accounting principles; h. Failure to comply with PASs and Philippine Auditing Practice Statements; and, i. Conduct of non-audit services without undertaking safeguards to reduce threat to his independence. - Accreditation process: currently handled by the External Auditor Selection Team in the BSP; from June 2019 a single accreditation framework across SEC, BSP, IC and PDIC to be implemented with the SEC as designated central agency. BSP retains veto on accreditation and the selection is valid for a period of five years. - Supervisors must make an annual assessment of external auditors and may recommend deletion from the list even prior to the three-year renewal period if the external auditors’ report did not comply with BSP requirements. - Evidence cited of BSP delisting an audit firm for failing to meet required standards. - Appendix 39 requires external auditor and/or auditing firm to be changed, or the lead partner rotated every five years or earlier, with rotation of the lead partner having an interval of at least two years. Rotation policy is reviewed by the BSP as part of routine supervisory process. ### Interaction between supervisor and external auditors; reporting obligations (EC8, EC9) - Routine meetings with external auditors do not form part of the supervisory process, but meetings are convened on an ad hoc basis, generally to discuss accounting treatment of certain financial transactions without representation from the bank concerned. - Memorandum M-2014-011 frames the BSP–external auditor relationship, including principles that: a. BSP and external auditors have complementary roles ingrained in statutes; b. External auditors reporting on adverse findings is useful to BSP monitoring of financial condition and risk profile; c. BSP engages external auditors to arrive at consensus on treatment of certain banking transactions; d. BSP and external auditors have complementary concerns though focus differs; e. External auditors can benefit from BSP work; significant supervisory issues raised by BSP could inform scope of audit regarding going concern assumption. - Memorandum provides external auditor read-access to the BSP’s ROE on a bank when conducting its audit; concerns identified in the ROE may inform audit scope. - A decision of the MB prevents supervisors from discussing supervisory concerns with external auditors due to legal prohibitions in S. 27 and 28 of the NCBA; constraints inhibit effective dialogue. A review into establishing more effective working arrangements and formal information sharing has been initiated by the MB. BSP may consider routine meetings (at least annually) with external audit firms as part of supervisory process. - Circular 1040 requires external auditors to report to the BSP any matter affecting the soundness or condition of a bank/quasi-bank, including (reporting timelines and triggers): - Within 15 calendar days after discovery: (i) Any material finding involving fraud or error; (ii) Actual or potential losses, the aggregate of which amounts to at least ten percent (10%) of the consolidated total assets of the BSFI; (iii) Significant doubt as to the ability of the BSFI to continue as a going concern; (iv) Material breach of laws or BSP rules and regulations such as but not limited to prescribed capital and liquidity ratios, significant deficiency in allowance for credit losses, material weaknesses in fair value measurement methodology, and significant vulnerabilities to money laundering and combating the financing of terrorism; (v) Material internal control weaknesses which may lead to financial reporting problems; and (vi) Findings on matters of corporate governance that may require urgent action by the BSP. - The 15 calendar-day period provides time for the external auditor to investigate and establish whether there is substance to the issue; in practice, material concerns would be reported immediately. - Appendix 39 prescribes that the audit engagement contract should include a provision allowing disclosures by the external auditor to the BSP. Bank management is required to be present during discussions or at least be informed of adverse findings, except where the external auditor believes management is engaged in fraudulent conduct. *Appendix 39 of S. 164 of the MORB (excerpt).* ### Section 174 of the MORB provides that the disclosure of an external auditor’s adverse ### 1phlea2020003 - Section 174 of the MORB provides that the disclosure of an external auditor’s adverse ### Principle 27 — Interaction with external auditors - Assessment: Largely compliant - Findings: - Section 174 of the MORB provides that the disclosure of an external auditor’s adverse findings to the BSP should not be a ground for civil, criminal or disciplinary proceeding against the audit firm. - In practice there have been very few occasions when auditors have contacted the BSP to report matters of material significance. - Banks’ financial reporting requirements are in accordance with international standards. - The BSP does not engage with external auditors on a regular basis as part of the routine supervisory process. - External auditors have access to the BSP’s Reports of Examination, but supervisors face constraints on sharing information on a bank with external auditors as part of an ongoing dialogue. - A review into establishing more effective working arrangements with external auditors on the sharing of information has been initiated by the MB. - Recommendations: - Remove any constraints on information sharing between BSP supervisors and external auditors - Introduce routine meetings between BSP supervisors and external auditors as part of the supervisory process ### Principle 28 — Disclosure and transparency (overview) - The supervisor determines that banks and banking groups regularly publish information on a consolidated and, where appropriate, solo basis that is easily accessible and fairly reflects their financial condition, performance, risk exposures, risk management strategies and corporate governance policies and processes. ### EC1 — Legal/regulatory requirement to disclose periodically - Findings: - S. 61 of the GBL requires banks to publish a statement of their financial condition, including those of their subsidiaries and affiliates, at least once every quarter, in a newspaper of general circulation in the city or province where the bank’s principal office is located. - S. 175 of the MORB implements S. 61 of the GBL. - Banks with resources of P1 billion and above are required to publish their solo and consolidated balance sheets, where applicable, in a newspaper of general circulation. - Banks with resources of less than P1 billion may either publish their financial reports in a newspaper of general circulation or in their bank premises. - S. 174 of the MORB requires similar disclosure requirements for foreign bank branches in all their banking offices in the Philippines. - Circular 956 provides guidelines on the scope of the disclosures in annual reports and the sanctions to be imposed for non-disclosure of relevant information. Disclosures should cover the bank’s financial condition, performance, ownership, the risk management framework, and governance. ### EC2 — Scope and content of required disclosures - Findings: - S. 175 of the MORB sets out minimum disclosure requirements covering: - corporate policy; - detailed financial summary of profitability, capital, performance and balance sheet data/ratios; - financial condition and results of operations; - risk management framework; - corporate governance framework, including policies on related party transactions; - corporate information on structure and shareholdings of the group. - S. 174 of the MORB requires additional disclosures in notes to audited financial statements, including: - a. Basic quantitative indicators of financial performance such as return on average equity, return on average assets and net interest margin; - b. Risk-based capital adequacy ratio; - c. Concentration of credit as to industry/economic sector; - d. Breakdown of total loans as to secured and unsecured and breakdown of secured loans as to type of security; - e. Total outstanding loans to bank’s DOSRI, percent of DOSRI loans to total loan portfolio, percent of unsecured DOSRI loans to total DOSRI loans, percent of past due DOSRI loans to total DOSRI loans and percent of non- performing DOSRI loans to total DOSRI loans; - f. Nature and amount of contingencies and commitments arising from off- balance sheet items [include direct credit substitutes (e.g., export LCs confirmed, underwritten accounts unsold), transaction-related contingencies (e.g., performance bonds, bid bonds, standby LCs), short- term self-liquidating trade-related contingencies arising from the movement of goods (e.g., sight/ usance domestic LCs, sight/usance import LCs), sale and repurchase agreements not recognized in the balance sheet; interest and foreign exchange rate related items; and other commitments; - g. Provisions and allowances for losses and how these are determined; - h. Aggregate amount of secured liabilities and assets pledged as security; and, - i. Accounting policies which shall include, but shall not be limited to, general accounting principles, changes in accounting policies/practices, principles of consolidation, policies and methods for determining when assets are impaired, recognizing income on impaired assets and losses on non-performing credits, income recognition, valuation policies and accounting policies on securitizations, foreign currency translations, loan fees, premiums and discounts, repurchase agreements, premises/fixed assets, income taxes and derivatives. - Pillar 3 requirements apply to all banks, but disclosure requirements for stand-alone thrift, rural and cooperative banks are less onerous than for universal and commercial banks (requirements set out Part IX of Appendix 59 of the MORB). - The existing disclosure requirements are not compliant with the latest Basel III Pillar 3 requirements; coverage for universal and commercial banks includes elements of Pillar 3 but is not as comprehensive. - The BSP is revising its disclosure regime to align the requirements with the applicable BCBS standard. ### EC3 — Disclosure of group structure and related party information - Findings: - S. 5 (O) (ii) in Annex A-1 of Circular 965 requires all universal and commercial banks that are part of conglomerates to disclose in their annual report all entities in the group’s wider conglomerate structure. - The report on a bank’s conglomerate structure is required to be submitted to the BSP within thirty calendar days after the end of every calendar year. - Banks must disclose in their Consolidated Balance Sheet a list of all financial allied subsidiaries and their policies and procedures for managing RPTs, including managing conflicts of interest; responsibility of the RPT Committee; nature, terms and conditions, and original and outstanding individual and aggregate balances, including off-balance sheet commitments, of material RPTs. ### EC4 — Review and enforcement of disclosure standards - Findings: - Circular 956 and Memorandum No. M-2017-011 set out a detailed checklist of the disclosures required in annual financial reports and the sanctions for non-disclosure. - SGs 2008-019 and 2009-27 specify the form of detailed evaluation undertaken by BSP staff to ensure compliance with disclosure standards. - Information in published balance sheets/consolidated balance sheets is validated automatically against information provided in other prudential reports. ### EC5 — Public publication of aggregate banking system information - Findings: - The BSP publishes regular information on the banking system on its website, including aggregate statistical data on: 1. Balance sheet data, 2. Income statement data, 3. Selected performance indicators, such as asset quality, liquidity, profitability and capital adequacy ratios, 4. Trust and other fiduciary business and other management activities, 5. Mandated credit, and, 6. Selected information on loan accounts, deposit accounts and physical network. - The BSP also regularly publishes a semi-annual Report on the Philippine Financial System. *Source: 1phlea2020003 - Section 174 of the MORB provides that the disclosure of an external auditor’s adverse* ### 2. A factbook on the Philippine Banking System, which is a compilation of various ### 2. A factbook on the Philippine Banking System ### Overview - Compilation of information and statistical data of BSP supervised financial institutions: Physical Network and Directory, Aggregated Balance Sheet and Income Statement, Regional Distribution of Selected Accounts, individual Published Balance Sheet of Universal/Commercial/Thrift Banks and Summary Report on Compliance with Agri-Agra and MSME. - FSCC prepares and publishes an FSR on an annual basis; the first FSR was published in June 2018. ### Assessment of Principle 28 (Public Disclosure) - Grade: Largely compliant. - Key findings: - BSP prescribes detailed public disclosure requirements for banks on both a consolidated and solo basis and verifies compliance. - The disclosure regime is not as comprehensive as the current BCBS Pillar 3 framework in scope and detail for risk elements (e.g., NSFR, market risk, IRRBB and remuneration). - BSP is revising its disclosure regime to align with the applicable BCBS standard. - Recommendation: - Issue proposals on a revised Pillar 3 framework. ### Principle 29 (Abuse of financial services) — Assessment: Largely Compliant - High-level finding: - The supervisor determines that banks have adequate policies and processes, including strict customer due diligence (CDD) rules, to promote high ethical and professional standards and prevent banks from being used for criminal activities. ### EC1 — Laws/regulations on supervisory duties, responsibilities and powers (Description and findings) - Legal and regulatory framework: - S. 4 of the GBL outlines BSP’s general supervisory powers over banks. - Anti-money laundering legislation: RA No. 9160 (Anti-Money Laundering Act of 2001), as amended; IRR issued 2001 and revised 2003, 2012, 2016; 2018 Implementing Rules and Regulations (2018 AMLA IRR). - RA No. 10168 (Terrorism Financing Prevention and Suppression Act of 2012) and s. 7 of the AMLA authorize the AMLC to investigate financing of terrorism and undertake measures such as freezing and forfeiture. - BSP oversight and instruments: - BSP oversees compliance of AML/CFT requirements for banks, quasi-banking and non-banking entities, MSBs, credit granting businesses and payment system operators. - Circular No. 706 (Updated AML Rules and Regulations, 2011), Circular No. 950 (2017), Circular No. 1022 (2018); MORB Part 9, 2017 incorporates UARR; 2018 IRR to be incorporated into MORB when next updated. - CDD/KYC requirements embedded in S. 3, Rule 18, Chapter VI of 2018 AMLA IRR and in BSP Circular No. 706 as amended. - BSP AML supervisory architecture: - Dedicated unit: Financial System Integrity Department under FSS (Currently 51 (approved 79) AML specialists with the requisite qualifications/robust continuing education program). - On-site examination framework assessing adequacy of banks’ controls and systems to prevent, identify and report ML/FT. - AML Risk Rating System (ARRS) distinct from overall bank risk assessment; AML weaknesses/findings noted in ROE with directives/remedial actions. - On-site exam frequency: banks rated “4” every three years; banks rated 3 every two years; higher risk banks receive more attention. - AML specialists provide technical assistance to front line examiners of smaller banks. - Need to reexamine total number of AML experts given additional AML/CFT supervisory oversight of new entities. ### EC2 — Banks’ policies/processes to promote high ethical standards and prevent criminal activity - Regulatory requirement: - S. 911 of the MORB (as amended by Circular Nos. 706 and 950) requires adoption of a comprehensive and risk-based Money Laundering and Terrorist Financing Prevention Program (MTPP per Circular No. 1022). - MTPP (previously MLPP) must include policies, controls and procedures to manage risks identified in risk assessment and apply enhanced measures for higher risks. - Supervisory practice: - BSP’s AML on-site examiners review adequacy of banks’ policies/processes for promoting high ethical/professional standards and preventing/detecting/reporting criminal activity. ### EC3 — Reporting to supervisor when suspicious activities are material - Reporting channels: - All suspicious activities under the AMLA are reported by banks to the AMLC. - Banks must submit reports or advise BSP of certain suspicious/illegal activity or incident of fraud (Php 20,000 and no threshold level if an insider crime) material to safety, soundness or reputation. - S. 173 of the MORB requires banks to report incidents of banking fraud where the amount involved per incident is Php 100,000 or more. - Purpose: - Notifications to BSP enable appropriate supervisory attention. ### EC4 — Supervisor informs FIU and shares information on suspicious transactions - Institutional arrangement: - AMLC is the FIU; dealings with BSP governed by the 2019 Memorandum of Understanding with the AMLC (MB Approved dated 7 March 2019). - MoU provides guidelines on sharing information both ways (e.g., BSP provides copies of AML/CFT on-site examination reports for ARRS rated 1; AMLC notifies BSP of legal proceedings pertaining to STRs/CTRs). - Constraints: - BSP is prohibited from sharing CDD information held by banks due to banking secrecy legislation; BSP may request information by demonstrating probable cause and cannot share without consent of the MB. ### EC5 — CDD policies/processes and integration into risk management - Elements expected (preserved verbatim from source): - (a) a customer acceptance policy that identifies business relationships that the bank will not accept based on identified risks; - (b) a customer identification, verification and due diligence programme on an ongoing basis; this encompasses verification of beneficial ownership, understanding the purpose and nature of the business relationship, and risk-based reviews to ensure that records are updated and relevant; - (c) policies and processes to monitor and recognize unusual or potentially suspicious transactions; - (d) enhanced due diligence on high-risk accounts (e.g. escalation to the bank’s senior management level of decisions on entering into business relationships with these accounts or maintaining such relationships when an existing relationship becomes high-risk); - (e) enhanced due diligence on politically exposed persons (including, among other things, escalation to the bank’s senior management level of decisions on entering into business relationships with these persons); - (f) clear rules on what records must be kept on CDD and individual transactions and their retention period. Such records have at least a five-year retention period. - BSP supervisory findings: - Examiners assess customer acceptance policies (prohibitions on anonymous accounts, fictitious names, numbered checking accounts). - CDD program: verification of customer and beneficial owner identities; exemptions where company is listed on a stock exchange or majority-owned subsidiary of such a company. - Monitoring/recognition of unusual transactions: examiners noted the required timeframe for filing of STRs should be improved (see Recommendation 20.1 of the Asia/Pacific Group MER 2019: s. 9(c) of the AMLA allows STRs to be filed within five working days). - Enhanced due diligence for higher-risk accounts and PEPs, including escalation to senior management/Board and obtaining source of wealth/funds information. - Records retention and confidentiality: S. 924 of the MORB stipulates minimum 5 years retention. ### EC6 — Correspondent banking policies/processes - Regulatory requirements: - Rule 19 S. 3 of the 2018 AMLA-IRR and S. 923 of the MORB (as amended by Circular Nos. 706 and 950) require policies to prevent correspondent banking being used for ML and designate an officer responsible. - BSP supervisory practice: - Assess whether banks gather sufficient information about respondent banks, determine reputation and supervision quality, assess AML/CFT controls, obtain senior management approval before establishing relationships, and understand respective AML/CFT responsibilities. - S. 923 of the MORB (and Circular No 1022) provides guidelines on fund/wire transfers and associated risk mitigation. ### EC7 — Controls and systems to prevent, identify and report abuses - Supervisory practice: - BSP’s AML risk-based supervisory framework and on-site examination program assesses adequacy of controls and systems to prevent, identify and report ML/FT. - AML examiners review AML audit programs, compliance testing, STR reports, random sampling of covered TRs, newly opened accounts and closed accounts, effectiveness of risk profiling and escalation, and due diligence on existing clients. ### EC8 — Adequate powers to take action against non-compliance - Legal and enforcement powers: - S. 37 of the RA gives BSP MB authority to impose actions on banks, directors and officers for willful violations, delays in reports, refusal of examination, false statements, willful failure to comply with banking laws, or conducting business in an unsafe or unsound manner. - BSP can impose administrative sanctions and monetary penalties for AML/CFT non-compliance (S. 941 of the MORB and S. 4811Q of the MOR-NBFI). - Range of enforcement actions against Board members, senior management or line officers: written reprimand, restriction of certain licenses/products, suspension or removal from office, disqualification. - AMLC may undertake enforcement/legal action via the Office of the Solicitor General (s. 7 of the AMLA). - For heightened supervisory concern (high AML composite risk rating) enforcement actions include corrective action, sanction, additional supervisory enforcement (e.g., letters of commitment up to revocation of BSP license) consistent with S. 002 of the MORB. - Observations: - BSP has used administrative sanctions and monetary penalties in past AML/CFT deficiency cases, but needs to ensure consistent use of monetary penalty regime. ### EC9 — Internal audit, compliance officers, screening and training - Expectations assessed by BSP (S. 911 of the MORB): - (a) Internal audit: qualified personnel, periodic independent evaluation for CDD/CTR/STR reporting, testing of electronic AML/CFT monitoring, reporting to Board, tracking of deficiencies. - (b) Compliance function: periodic testing, reporting infractions, staff communication on AML/CFT requirements. - (c) Screening/recruitment: ensure qualified persons with no criminal records assume sensitive functions. - (d) Training: effective and continuous training programs for staff on CDD, CTR/STR reporting and internal reporting processes. ### EC10 — Staff reporting procedures and MIS - Regulatory requirements: - S. 911 of the MORB requires MTPP to include procedures for suspicious transaction reporting, including systems for flagging, monitoring and reporting transactions that qualify as suspicious, regardless of amount, and aggregation of below-threshold transactions for future reporting. - ST reporting must include a reporting chain and designation of a Board-level or approved committee (or compliance officer if resources do not permit a committee) to decide on filing to AMLC; Board must be informed. - S. 911 requires an AML/CFT monitoring system appropriate to risk-profile and business complexity capable of generating timely, accurate and complete reports to senior management and the Board. - S. 132 of the MORB requires audit committee mechanisms for confidential reporting of improprieties and protections for whistleblowers. - Circular No. 969 strengthens corporate governance for whistleblowing protections and independent investigation/follow-up. - Supervisory practice: - BSP’s AML on-site examination framework assesses adequacy of staff reporting procedures, MIS effectiveness, and AML specialists join on-site teams for large banks; most rural and cooperative bank exams include an AML component. ### EC11 — Protection from liability for good faith reporting - Legal protection: - S. 922 of the MORB (Exemption from Bank Secrecy Laws) and S. 9 of the AMLA provide safe harbor: no administrative, criminal or civil proceedings shall lie against any person for having made a CTR or an STR in the regular performance of duties in good faith. - However, S. 922 prohibits communicating the fact of a CTR/STR or its contents; violation can render the officer/employee criminally liable under the AMLA. ### EC12 — Cooperation and information sharing with domestic and foreign authorities - Constraints and mechanisms: - BSP cannot share information pertaining to suspicious activities with other domestic/foreign financial sector supervisors for supervisory purposes unless authorized by the Monetary Board. - AMLC has authority to receive and act on requests from foreign states; BSP can refer foreign counterpart cases to AMLC for investigation and the AMLC’s results can be referred back to BSP for transmittal to requesting foreign counterpart per the 2019 MoU. - 2019 MoU provides guidelines on sharing AML/CFT on-site examination reports for ARRS rated 1 and use by AMLC in administrative proceedings. ### EC13 — In-house specialist expertise and communication of ML/TF risks - BSP actions: - BSP issues regulations, circulars, public advisories, Circular-Letters, Memoranda to banks, media releases and primers to prevent financial abuse and mitigate ML/TF risk. - BSP requires FIs to be vigilant in account opening, transaction monitoring and compliance with AML/CFT reporting to AMLC. - BSP required banks to take into account results of the 2017 National Risk Assessment in their AML/CFT risk assessments. - S. 50 of the NCBA gives BSP authority to conduct investigations into criminal activities. ### Overall findings and supervisory observations - The AML/ATF legislative framework for BSP-covered banks appears effective. - BSP’s AML risk assessment framework and on-site examination coverage are robust. - The 2019 MoU between AMLC and BSP clearly outlines coordination, collaboration and robust information sharing. - BSP uses front-line supervisors for AML on-site examinations for: - 526 thrift, rural and co-operatives (smaller FIs); and - 1162 non-banking entities such as money service businesses, credit granting businesses and payment system operators. - Contingent of AML technical experts: - 51 experts (up from 34 one year ago) with a total of 79 approved positions; this contingent may need reassessment given supervisory scope. - Enforcement: - BSP uses enforcement tools (directives, letters of commitment, monetary penalties) but needs to ensure consistent application of the monetary penalty regime for AML/CFT non-compliance. ### Recommendations (preserved from source) - Increase contingent of AML risk specialists to ensure the effectiveness of its AML/CFT supervision program. - Ensure consistent use of the monetary penalty regime when banks are found in non-compliance with AML and CFT requirements. *Source: 1phlea2020003 - 2. A factbook on the Philippine Banking System (IMF chapter).* ### 1. Responsibilities, objectives and ### 1. Responsibilities, objectives and powers ### Legislative and regulatory constraints - Bank secrecy laws: all bank deposits in the Philippines "are considered to be of an absolutely confidential nature and may not be examined, inquired or looked into by any person, including the BSP, except in defined circumstances." This constrains BSP’s ability to conduct effective ongoing supervision. - BSP access to depositor information: recommendation that "BSP should be granted unimpaired access to information on depositors and given the ability, without constraints, to employ and share depositor information for any prudential purpose (e.g., funding concentrations from related parties, intra-group dependencies, cash flow analysis, relationship to RPT and off-site AML data and analysis)." - Power to review affiliates/parents: BSP does not have power to review and examine parents or other affiliates of BSP‑supervised firms. Recent legislation provides authority to obtain data from such entities for "statistical and policy development purposes," but: - BSP has not used this authority to date. - The stated scope of the authority is limited and "does not provide the BSP with full powers to review the activities of parent companies and of companies affiliated with parent companies." - Coordination gaps: - Current legislation does not clearly delineate responsibilities and objectives between BSP (primary supervisor of banks) and PDIC, which also has supervisory and enforcement roles in certain situations. - BSP and PDIC have signed an MOA setting out responsibilities and information sharing arrangements, but it "is not a public document." - BSP and CDA do not have a formalized coordination and data‑sharing agreement. ### Supervisory independence, governance and resourcing - Independence: BSP "has full discretion to take any supervisory actions or decisions on banks and banking groups under its supervision and is adequately resourced to carry out those duties." - Operational independence concern: attendance of a Cabinet member on the MB "compromises" operational independence despite no evidence of past political interference. - Cooperation: existing regulations and practical arrangements with domestic and foreign regulators "provide an effective framework for cooperation and collaboration." MOAs "adequately reflect the need to protect confidential information." ### Key weaknesses in supervisory perimeter and powers - Licensing and entry: - BSP can set licensing criteria and reject applications, assess ownership and governance, and obtain prior consent of foreign authorities for foreign banking organizations. - Weaknesses: licensing regulations "do not clearly identify grounds for revocation (especially when based upon false information)," "do not mandate a review of the suitability of ultimate beneficial owners," and do not consistently require governance, internal controls and risk management to be "in place" upon entry. A system for prompt monitoring of new entrants is lacking. - Transfer of significant ownership: - The recently enacted NCBA in S. 25‑A "could operate to restrict BSP’s authority to pre‑approve transfers of ownership to those transactions involving transfers of voting shares." - The NCBA grant of BSP prior approval authority "does not extend to ownership of significant controlling interests, held directly or indirectly." - Regulations lack clarity on definitions of "control", "significant controlling interest", and "beneficial ownership"; requirements are tied to voting shares. - No explicit requirement to notify BSP of material negative information affecting suitability of direct or indirect controlling interests. - Given conglomerate ownership and cascading ownership chains, these gaps "could impair BSP’s ability to review and approve transfers of significant controlling interests and assess suitability of ultimate beneficial owners." - Major acquisitions: BSP can approve/reject and impose prudential conditions on bank acquisitions, but "does not possess the power to approve major acquisitions by a bank’s parent or the parent’s affiliate," allowing significant non‑banking risks to be added to a conglomerate without BSP review. - Resolvability and corrective action: - No resolvability assessment process in place with PDIC for BSP‑supervised firms, including D‑SIBs. - BSP’s framework for early intervention and approach to resolving banks "is not fully developed." - PCA framework: banks placed into Prompt Corrective Action can "linger" for prolonged periods (years) while remaining capital deficient; PCA escalation is not tied to stages of regulatory capital decline; resolution/receivership is not imposed even where owners fail to recapitalize unless grounds under Sec. 30 of the NCBA, as amended, exist. - Result: unhealthy, poorly managed banks can remain licensed and active for prolonged periods. - BSP cannot fully protect banks from parent/affiliate actions because such entities are outside its regulatory perimeter; conglomerate information is updated only periodically and there is "no requirement that the bank or banking group provide a comprehensive and current view of the group‑wide risk concentrations and inter‑dependencies." - BSP does not conduct comprehensive resolvability assessments and "resolution plans are not developed," limiting BSP’s view of protective "ring‑fence" actions necessary to preserve critical economic functions. ### Supervisory approach, tools and reporting - Supervisory approach: BSP is evolving toward a more forward‑looking, risk‑based approach and "reviews and assesses risks to the banking system as a whole" for use in individual oversight. - Supervisory techniques and tools: BSP employs an effective range of on‑site and off‑site techniques; integration of examination activities began "at the beginning of 2019" and will take time to complete and assess. Examinations include financial statement review, business model analysis, horizontal peer reviews, and stress testing; findings are communicated via the ROE with clear directives. Mandated corrective actions are monitored in monthly and quarterly updates. - Supervisory reporting: BSP has effective reporting requirements on solo and consolidated bases and "has adequate power to require and receives reports" about financial condition, performance and risks. However, bank secrecy and supervisory remit restrictions have inhibited BSP from requiring submission of all relevant information from the wider banking group. BSP should continue to enhance methodologies to assess risks posed by the wider group and to obtain information to support resolution planning and resolvability analysis. ### Consolidated supervision and group risk - Consolidated supervision: BSP adequately assesses consolidated capital and liquidity and ensures RPTs are arms‑length. Concentration risk is not captured adequately because the single borrower limit is not applied at the consolidated level; proposed LE framework revisions will address this. - Many D‑SIBs are in conglomerate structures with non‑regulated parent companies and affiliates engaged in non‑banking activities, and the wider group is not captured within BSP’s regulatory perimeter. - BSP cannot review/examine parents or affiliates of supervised firms (see BCP1). ### Risk governance, capital and risk-specific issues - Corporate governance: BSP’s Corporate Governance regulations and guidelines are comprehensive with clear Board and senior management requirements; on‑site examinations adequately review compliance. - Risk management process: - Regulatory framework is "adequate" for defined risk areas (credit, IRRB, market, operational). - Need to finalize drafts on model risk management and reputational risk exposures; update regulations to require public disclosure of dismissal/replacement of CEO, CRO, Chief Compliance Officer and Internal Audit Executives. - ICAAP guidance needs updating; recovery plans should be separated from ICAAP and shared with PDIC to include resolution authority views. - FSCC approved a Financial Crisis Management and Resolution Framework, but individual agency crisis management plans and contingency arrangements remain preliminary and require more development. - Capital adequacy: appropriate capital framework for major banks with minimum capital ratios and a leverage ratio set "at more conservative levels than applicable Basel standards." Framework for stand‑alone rural, thrift and cooperative banks is being revised to align with Basel III. BSP does not directly vary individual banks’ capital requirements by risk profile but has adjusted certain asset risk weights and introduced a higher capital regime for D‑SIBs. - Credit risk: current regulations on credit risk management and on‑site supervision are adequate except for lack of guidance on internal models to measure credit risk. BSP should establish concentrated technical credit expertise and conduct thematic/horizontal credit reviews as banks increasingly use complex credit facilities and models. - Problem assets, provisions and reserves: regulations for early identification and management of problem assets and provisioning are adequate. BSP should consider changing loan provisioning guidance for less sophisticated banks on secured loans and ensure impairment modelling expectations align with proposed SEC guidance. - Concentration risk and large exposure limits: - On‑site examinations assess adherence to current LE framework, but weaknesses exist: SBL not captured on a consolidated basis; definition of capital base against which SBL is calculated is "not compliant with the applicable Basel standard;" clarification needed on identifying economic interdependence for aggregating exposures to connected counterparties. - These issues "will be addressed" by proposals in BSP’s exposure draft amending the current LE framework. - Transactions with related parties: BSP’s definition of related parties "is broader than the suggested Basel definition" and regulations appear adequate; on‑site teams effectively challenge RPT management. As BSP adopts more risk‑based supervision, off‑site surveillance and assessment of RPT data will be key. - Country and transfer risks: BSP’s off‑site surveillance and on‑site framework for country exposures are adequate. BSP needs to finalize the draft Circular on Risk Management Guidelines on Investment Activities of banks to capture investment side of country and transfer risks. ### Core principle grades (selected) - 2. Independence, accountability, resourcing and legal protection for supervisors: LC - 3. Cooperation and collaboration: C - 4. Permissible activities: C - 5. Licensing criteria: LC - 6. Transfer of significant ownership: MC / MNC (two related entries highlight different aspects and grades) - 7. Major acquisitions: C - 8. Supervisory approach: LC - 9. Supervisory techniques and tools: C - 10. Supervisory reporting: C - 11. Corrective and sanctioning powers of supervisors: LC - 12. Consolidated supervision: LC - 13. Home‑host relationships: C - 14. Corporate governance: C - 15. Risk management process: LC - 16. Capital adequacy: LC - 17. Credit risk: LC - 18. Problem assets, provisions, and reserves: C - 19. Concentration risk and large exposure limits: LC - 20. Transactions with related parties: C - 21. Country and transfer risks: C *Source: 1. Responsibilities, objectives and powers (document content provided).* ### 22. Market risk LC ### 22. Market risk LC ### Market risk: framework and supervisory capacity - The regulatory framework and supervisory practice are appropriate for the complexity of market risk being run by banks, and the BSP is adequately resourced in terms of both numbers and levels of expertise to supervise banks’ market risk functions effectively. - The framework ensures that banks have adequate market risk management processes that take into account their risk appetite and risk profile. - There is a lack of clarity in the framework over the allocation of assets between trading and banking books, which creates capital arbitrage opportunities for banks. - Proposals to update the BSP market risk framework, when implemented, will address this ambiguity and, more generally, will clarify the governance and capital treatment of market risk. ### 23. Interest rate risk in the banking book (IRRBB) - Grade: LC - The legal and supervisory framework for ensuring banks have adequate systems that identify, measure, evaluate, monitor, report and control IRRBB is appropriate for the complexity of the risk being run by such banks. - The framework does not set IRR stress test requirements for smaller banks. - A revised set of IRRBB guidelines has been exposed to industry for comment which, when implemented, will introduce further enhancements to banks’ stress testing exercises and align the BSP framework with the applicable Basel standard. ### 24. Liquidity risk - Grade: LC - An appropriate regulatory framework is in place to ensure minimum requirements for liquidity and funding for universal and commercial banks. - The cashflow mismatch monitoring tools for the LCR should be reviewed and aligned more closely with applicable Basel standards. - The BSP has issued guidelines on a monitoring regime for intraday liquidity but has yet to introduce a reporting regime for intraday liquidity. - The BSP does not set individual liquidity and funding requirements for its banks above the statutory minimum that reflect the liquidity and funding profiles of those banks. - The liquidity regime for smaller banks is generally appropriate for such institutions. ### 25. Operational risk - Grade: C - BSP’s regulatory requirements pertaining to banks’ operational risk management framework appear to be adequate. - Assessors noted BSP’s plans to augment IT technical expertise relating to developments in financial technology and cyber related risk. ### 26. Internal control and audit - Grade: C - BSP’s regulatory framework and annual on-site examination processes provide supervisors with an adequate view of the effectiveness of a bank’s internal control frameworks and IA function. - BSP has updated its requirements pertaining to a bank’s compliance function and updated its supervisory assessment approach to address prior BCP assessment findings. ### 27. Financial reporting and external audit - Grade: LC - Banks’ financial reporting requirements are in accordance with international standards. - The BSP does not engage with external auditors on a regular basis as part of the routine supervisory process. - Although external auditors have access to the BSP’s Reports of Examination, there are constraints imposed on supervisors sharing information on a bank with external auditors as part of an ongoing dialogue. - A review into establishing more effective working arrangements with external auditors on the sharing of information has been initiated by the MB. ### 28. Disclosure and transparency - Grade: LC - The BSP prescribes detailed public disclosure requirements for banks on both a consolidated and solo basis and verifies that these requirements are met. - The disclosure regime is not as comprehensive as the current BCBS Pillar 3 framework in terms of the scope and detail of coverage required across a number of risk elements (e.g. for LCR, NSFR, leverage, market risk, IRRBB and remuneration). - The BSP is revising its disclosure regime to align the requirements with the applicable BCBS standard. ### 29. Abuse of financial services (AML/ATF) - Grade: LC - The AML/ATF legislative framework as it pertains to the banks covered in BSP’s mandate generally appear to be effective. - BSP’s AML risk assessment framework and on-site examination coverage of entities appear robust. - The MoU between the AMLC and BSP, originally established in 2007 and updated in March 2019, clearly outlines coordination, collaboration and robust sharing of necessary information between the two regulatory agencies. - BSP uses front-line supervisors to carry out AML on-site examinations for: - 526 thrift, rural and cooperative banks; and - 1162 non-banking entities such as money service businesses, credit granting businesses and payment system operators. - The contingent of AML technical experts is 51 experts (up from 34 one year ago) with a total of 79 approved positions; this contingent may need to be reassessed. - Although BSP makes use of its enforcement tools (issuing directives, letters of commitment, etc.), it needs to ensure it is effectively utilizing its monetary penalty regime for AML/CFT non-compliance issues on a consistent basis. ### Recommended actions (selected, by Principle) - Principle (1) - Amend the bank secrecy laws to grant BSP full access to banks’ deposit and other data; - Provide BSP with the legal authority to review the activities of a bank’s parent companies and of companies affiliated with parent companies’ activities to determine their impact on the safety and soundness of the bank and the banking group; - Make the MOA between the BSP and PDIC public to provide greater transparency around the responsibilities of the two authorities; - Establish a bilateral agreement between the BSP and CDA to formalize co-ordination and data-sharing arrangements between the two authorities. - Principle (2) - Amend the Charter of the BSP to revisit the position of the Cabinet Member as a voting member of the MB; - Amend the NCBA to require public disclosure of the reason(s) for dismissal of the Head of the MB. - Principle (3) - Negotiate a MOA with the SSM to replace the existing MOA with BaFin; - Negotiate a formal MOA between the BSP and CDA; - Establish formal college of supervisor arrangements for sharing information between domestic supervisory bodies. - Principle (5) - Clarify in regulations or supervisory guidance the grounds supporting revocation (beyond the grounds supporting appointment of PDIC as receiver), including the ability to revoke when applications are determined to be submitted based upon false information; - Amend licensing criteria to ensure a review of the suitability of ultimate beneficial owners, where applicable, and specify that there must be a demonstration of financial strength of incorporators or subscribers adequate to provide additional financial support beyond the initial subscription level; - Amend licensing criteria to set objective criteria for licensing of new banks, foreign banks, and to grant licenses for additional authorities to apply standards consistent with ongoing supervision equally across applicants, including ensuring that applicants have adequate governance, internal controls and risk management systems ‘in place’ upon commencing operations; - Clarify licensing guidelines or procedures to mandate more frequent review of newly licensed banks upon entry into the banking system; - Ensure that ongoing supervision incorporates a review of relevant banks’ compliance with applicable local tax, licensing or other supervisory requirements; - Continue close coordination with local government units to coordinate regarding licensing and permitting processes. - Principle (6) - Review and amend the legal and regulatory framework related to transfer of significant controlling interests to include the definition of ultimate beneficial owner or direct and indirect significant controlling interest; - Ensure BSP has the power to review, reject and impose prudential conditions upon the transfer of controlling interest or significant ownership, including beneficial ownership, of a bank held indirectly; - Ensure BSP has the power to review and enforce the suitability of beneficial owners and obtain timely information regarding material changes to their suitability. - Principle (8) - Develop and implement, in conjunction with PDIC, policies and standards to assess resolvability of firms and promptly resolving banks, especially D-SIBs, in an orderly fashion; - Develop and implement policies and standards requiring regulated financial institutions to support a resolvability assessment, including consideration of inter-connectedness, structure and operations within the wider group and adopt measures to address impediments to resolvability. - Principle (11) - Continue ongoing revisions to the PCA framework and implement policies and procedures that will operate to ensure that firms placed into PCA status are addressed in a timely fashion and place firms into resolution in a prompt and timely fashion; - Continue to work with PDIC to establish effective coordination mechanisms to ensure that, where appropriate grounds exist, firms are placed into resolution in a prompt and timely fashion; - Conclude efforts to develop and implement policies and standards regarding the supervisory approach to ring-fence the bank from the actions of parent companies, subsidiaries, and other related companies in matters that could impair the safety and soundness of the bank. - Principle (12) - Bring financial institutions in conglomerate structures which are outside the BSP consolidated banking group and which are regulated by other domestic regulators into the consolidated banking group to enable the BSP to capture the risks they pose to the banking group; - Require BSP regulated banks within conglomerate structures to specifically identify all risks arising from companies within their wider group structure in their ICAAP and describe fully the internal controls for reporting and managing such risks. - Principle (15) - Finalize draft exposures on model risk management, reputational and public disclosure of dismissal of CRO, CO and IA executives; - Develop and operationalize BSP’s crisis preparedness involving a systemic financial institution, including working with other regulatory agencies within the FSCC (e.g. sharing D-SIB recovery plans with the PDIC) to strengthen and formalize contingency arrangements pertaining to the recovery or resolution of a major bank failure; - Update guidance on ICAAP to reflect current practices. - Principle (16) - Set individual capital ratios for banks based on their risk profile as part of the SRP process; - Introduce a simplified ICAAP for the rural, thrift and cooperative banks. - Principle (17) - Develop guidance on the management/use of internal models to measure credit risk; - Establish a concentrated area of credit expertise; - Conduct thematic/horizontal credit reviews across larger FIs focusing on bank’s credit risk management practices. - Principle (18) - Change loan loss provisioning guidance for less sophisticated banks pertaining to secured loans (collateral valuation, maximum write-off periods); - Align BSP’s expectations on banks’ methodology/modelling of the impairment of expected credit losses with the SEC proposed guidance. - Principle (19) - Update regulations governing large exposures to ensure limits are calculated both on a solo and consolidated basis. - Principle (21) - Finalize the draft Circular on Risk Management Guidelines on Investment Activities of banks to capture the investment side of the country and transfer risks in the regulatory framework. - Principle (22) - Implement the proposals on a revised market risk framework and on risk management guidelines on investment activities. - Principle (23) - Implement the proposals on a revised set of IRRBB guidelines. - Principle (24) - Review the monitoring tools for the LCR to align them more closely with applicable Basel standards, including introduction of a more granular cashflow mismatch report; - Introduce an ILAAP framework to enable the BSP to set individual liquidity and funding requirements for banks above the statutory minimum to reflect the particular liquidity and funding profiles of those banks; - Implement an intraday liquidity reporting regime. - Principle (27) - Remove any constraints on information sharing between BSP supervisors and external auditors; - Introduce routine meetings between BSP supervisors and external auditors as part of the supervisory process. - Principle (28) - Issue proposals on a revised Pillar 3 framework. - Principle (29) - Increase contingent of AML risk specialists to ensure the effectiveness of its AML/CFT supervision program; - Ensure consistent use of the monetary penalty regime when banks are found in non-compliance with AML and CFT requirements. ### Authorities’ response — key points - The BSP thanks the joint IMF and World Bank BCP assessment mission team for the comprehensive assessment and recognizes its value for benchmarking reforms. - Since the 2009 FSAP mission, significant developments in the legal and regulatory frameworks were put in place, including amendments to the BSP Charter, adoption of the Basel III framework, and standards on corporate governance and risk management. - The BSP highlights that the cabinet member on the Monetary Board represents only one (1) vote while a majority vote of the seven-man team is needed to approve a resolution; the Finance Secretary’s membership enhances coordination with the National Government. - The BSP asserts it has displayed operational independence since its establishment in July 1993 and notes that the majority of Monetary Board members are from the private sector. - The BSP notes recent NCBA amendments provide the power to disapprove transfers of shares to parties not fit and proper; although ‘ultimate beneficial ownership’ is not explicitly included in the definition of ‘control’, BSP does not consider this a constraint and has rejected unfit transfer applications. - On chartering, BSP applies common criteria focusing on suitability/fitness of shareholders and management and financial strength; foreign banks must comply with additional selection criteria under law. - The BSP issues directives even before finalization of Reports of Examination when necessary and expects banks to address key issues upon close of on-site examination; BSP will continue improving processes and resolution timelines for PCA and BRes frameworks. - BSP applies proportionality by issuing simplified guidelines for thrift, rural and cooperative banks; ICAAP submission is not imposed on these banks but they must conduct capital planning validated during onsite examination. - BSP has embarked on a four-phase program to further strengthen liquidity, including enhancement of foundational liquidity risk management guidelines, adoption of LCR and NSFR frameworks and issuance of Intraday Liquidity Reporting guidelines. - BSP does not require banks to develop an ILAAP; existing liquidity risk management framework requires banks to adopt appropriate risk measurement and internal risk limits covering all significant sources of liquidity risk. BSP will await further BCBS guidance on ILAAP to ensure consistency with international standards. - The BSP will continue to pursue proportionate and responsive regulatory reforms. *Source: 1phlea2020003 - 22. Market risk LC (IMF).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1phlea2020003.pdf_