## 1phlea2022003 ## Source details **Canonical URL:** [1phlea2022003](https://www.imf.org/-/media/files/publications/cr/2022/english/1phlea2022003.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1phlea2022003.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1phlea2022003.pdf.json) --- ### Overview - Technical note evaluating the Philippine macroprudential framework and providing recommendations to strengthen it. - First evaluation of macroprudential arrangements, policies and tools in the context of a Financial Sector Assessment Program (FSAP). - Assessment based on IMF Staff Guidance Note (IMF, 2014a), background note (IMF, 2014b), and other IMF policy papers. - Assesses current financial vulnerabilities in the Philippines, including those related to the COVID-19 pandemic, and provides recommendations. ### Institutional framework — progress since the previous FSAP - Financial stability mandate in the amended BSP Charter (Republic Act No. 11211), the New Central Bank Act (NCBA), signed in February 2019. - Key institutional developments since 2010: - 2011: Financial Stability Coordination Council (FSCC) established; Treasury invited but has no voting rights. - 2017: Office for Systemic Risk Management (OSRM) established within BSP; headed by an Assistant Governor and acts as FSCC secretariat. - BSP introduced elements of Basel III including the Countercyclical Capital Buffer (CCyB) and capital buffers for Domestic-Systemically Important Banks (D-SIBs); CCyB kept at zero percent since December 2018. - June 2018: BSP published first Financial Stability Report (FSR); planning semiannual publication; first second semester FSR for 2020 published November 2020. - 2020: BSP created Financial Stability Policy Committee (FSPC) to discuss financial stability issues and policy proposals before inter-agency FSCC discussion. - June 2020: FSCC published the Philippine Macroprudential Policy Strategy. ### Financial authorities and inter-agency cooperation - BSP is the sole regulator with a financial stability mandate in the NCBA (amended February 2019). - BSP definition of financial stability: “Financial stability is the state when prospective systemic risks are mitigated so as to allow financial consumers, both individuals and corporate entities, to pursue viable economic goals while avoiding disruptions to the smooth functioning of the financial system that can negatively affect the rest of the economy”. - FSCC Macroprudential Policy Strategy Framework (June 2020) articulates BSP’s macroprudential powers and interaction with other mandates; macroprudential policy focuses on limiting system-level risks over time and across market components, distinct from microprudential supervision. ### Institutional framework and cross‑sectoral bodies - Relevant authorities: - Securities and Exchange Commission (SEC): supervision over corporate sector, capital market participants, securities and investment instruments; maintains country register. - Insurance Commission (IC): supervises life and non-life insurance, reinsurance, mutual benefit associations, trusts for charitable uses, insurers’ intermediaries; authority under R.A. No. 9829 and Executive Order 192 (series of 2015). - Philippine Deposit Insurance Corporation (PDIC): deposit insurance; principal liquidator/receiver of closed banks; membership mandatory; protection up to PHP 500,000 per depositor per bank. - FSCC: - Formed 2011; voluntary; meets quarterly. - Members: Heads of financial sector authorities and DoF Secretary; BSP Governor chairs. - Structure: Executive Committee, Technical Secretariat (OSRM), Working Groups, Communications and Capacity‑Building Unit; Executive Committee meets quarterly. - Most strategic macroprudential decisions discussed in FSCC; OSRM is technical secretariat. - Financial Sector Forum (FSF): - Formed July 2004; BSP, SEC, IC, PDIC; meets six times per year; regulatory forum; chaired by BSP. ### BSP internal governance, committees, and OSRM - Financial Stability Policy Committee (FSPC): - Subcommittee of the Monetary Board (MB) established January 2020; replaced previous Financial Stability Committee. - All MB members are FSPC members; meetings attended by AG for financial stability and DGs for monetary policy and financial sector supervision. - No external members; meets every two months. - FSCC agenda items pre-discussed in FSPC; OSRM provides technical support and materials. - Office for Systemic Risk Management (OSRM): - Established 2018; headed by an AG; reports to the Governor; not part of a specific BSP sector. - Publishes Financial Stability Review (FSR); first FSR June 2018; FSR published semi‑annually. - Performs analytical work and financial stability policy preparation. - Monetary Board (MB) decision-making: - Monetary policy and prudential supervision decisions occur in MB; no separate decision-making committees. - Charter allows DGs to attend MB meetings with “the right to be heard” (no voting rights). - Financial stability represented by the Governor, not by the Assistant Governor heading OSRM. - BSP sector structure: - Three sectors: (i) Monetary and Economics Sector, (ii) Financial Supervision Sector, (iii) Corporate Services Sector. February 2021: fourth sector created—Payments and Currency Management Sector. ### Key findings — coordination, governance, and OSRM status - Internal coordination and decision-making: - Collaboration within BSP should be further enhanced across Monetary and Economic Sector, Financial Supervision Sector, and OSRM to conduct essential macroprudential risk analysis and ensure balanced decisions. - Macro-scenario stress testing is missing despite staff capacity; BSP should start macroprudential bank solvency stress tests with inputs from research (macro scenario), supervision (bank stress test), and OSRM (second-round effects and bank‑NFC liquidity linkages). - Decision-making should ensure representation of monetary, microprudential, and macroprudential perspectives with mechanisms to resolve conflicting views. - Possible internal arrangements: advisory committee for technical cooperation; expanded participation rights for OSRM senior staff; strengthen legal standing and policy-making process of FSPC. - Prudential tool responsibilities: - CCyB is the only prudential tool explicitly recognized as macroprudential for banks; many other tools (LTV, liquidity, FX positions) have been set from microprudential perspectives and not explicitly calibrated countercyclically. - Operational procedures to set macroprudential tools in a systemic risk-based and countercyclical way are missing, including for CCyB. - Recommendation: BSP should not divide right to use prudential tools between FSS and OSRM; both should develop views and proposals from microprudential and macroprudential perspectives. - FSS should focus on institution‑specific risk; OSRM should focus on time‑varying (cyclical) and cross‑sectional systemic risks with clear activation and relaxation criteria. - Data and staffing gaps: - Data gaps constrain risk analysis: lack of granular credit risk data (including a fully operational national credit registry), current collateral values and loan-to-value ratios, small and unlisted NFCs, household indebtedness surveys, and detailed depositor information due to bank secrecy. - NCBA grants BSP new powers to collect information from broader economic sectors; SEC initiatives to digitalize NFC data need operationalization. - OSRM appears understaffed relative to allocated budget and evolving scope; BSP should periodically assess staffing adequacy. - FSCC limitations: - FSCC voluntary, underpinned by a 2014 MoU; has no formal legal framework for decision-making and no formal powers. - Implementation of FSCC decisions depends on each agency imposing decisions within their remit. - Recommendation: FSCC should obtain powers (clear Charter/Terms of Reference) to make formal recommendations with a comply‑or‑explain mechanism to mitigate inaction bias while preserving institutional autonomy. - Note: Post-assessment, on 06 July 2021, Office of the President issued Executive Order No. 144 s. 2021 institutionalizing the FSCC; Executive Order section 3 specifies purpose/objectives to enhance financial system stability and formulate a Macroprudential Policy Strategy Framework. - Sharing a financial stability objective: - Providing a financial stability objective to IC, SEC, and PDIC could strengthen FSCC influence and coordination and help address regulatory arbitrage and shadow banking risks. - Maintain segregation of macroprudential and microprudential functions to avoid confusion and preserve independence. ### Systemic risk monitoring and macroprudential strategy - Macroprudential Strategy Framework (June 2020) observations: - Emphasis on Growth at Risk (GaR) as primary measure seems inconsistent with BSP practice; GaR constructed using macro and market variables that do not include some systemic risk indicators BSP already uses. - GaR alone would not capture different types of systemic vulnerabilities and risks. - GaR useful for calibrating broad‑based tools (e.g., CCyB) but other tools require wider/different indicators. - Recommendation: construct the ultimate target of macroprudential policy according to objective of mitigating systemic risk and link target and monitoring processes accordingly; elaborate toolkit and communication of macroprudential versus microprudential differences. - OSRM corporate stress tests and systemic indicators: - OSRM conducts two tests for non‑financial corporates (NFCs): - Debt‑to‑Earnings Borrowers Test (DEBT): assesses capacity of borrowers to pay in periods of rising interest rates and peso depreciation. - Borrowers Interconnectedness Index (BII): identifies main common borrowers/debtors of the banking system. - OSRM conducts interconnectedness and contagion analysis of corporates and banks; developing bank interconnectedness analysis using payment system data. - Systemic risk monitoring toolkit elements: - Interconnectedness analysis, contagion risk model. - Excess credit analysis. - DEBT and BII. - Delta CoVaR and MES. - GaR Framework variables include Money supply, market prices, a cross‑border yield differential, local returns of equity. ### Stress testing for banks — current framework - Current stress testing: - Conducted by Financial Supervision Sector (FSS) to assess resilience of individual banks. - Consists of single factor sensitivity tests; does not cover comprehensive stress scenarios that capture macroeconomic dynamics. - Results mainly used for supervisory actions; aggregate results published periodically. - Main single factor stress tests: - Real Estate Stress Test (REST) for Real Estate Exposure (REE): - Single factor shock: 25 percent write-off rate on REE and ROPA/NCAHS. - Hurdle rate: 10 percent of the CAR and 6.0 percent of CET1, on both solo and consolidated basis. - Coverage: all residential and commercial real estate loans, real estate investments, ROPA and NCAHS. - Conducted quarterly; covers all UKBs and TBs. - Uniform Stress Testing (credit and market risks): - Credit stress test: imposes a 20 percent and 50 percent write-off on net carrying value of credit exposures. - Market risk test: covers movements in interest rates and foreign exchange rates, based on simplified assumptions. - Coverage: credit risk exercise covers all UKBs and TBs; market risk exercise covers all UKBs and their subsidiary TBs, and stand-alone TBs with total assets of at least 5 PHP billion or total capital of at least 1 PHP billion. - Conducted annually with reference periods end‑June and end‑December. ### Recommendations to introduce macroprudential / macro‑scenario stress testing - BSP should start running macro‑scenario stress testing focused on systemic risk analysis (MaPSTs). - Rationale and scope: - MaPSTs cover comprehensive macro scenarios and are currently missing despite strong staff capacity. - Exercises could focus on systemic parts of the financial system such as UKBs. - Could examine common macro scenarios and include macro‑financial feedback effects. - Could link corporate sector stress tests to banks’ credit risks from NFC loans (e.g., use ICR‑based NFC stress test results to calculate stressed PDs for banks’ loan portfolios instead of PDs from banks’ NPL transition data). - When long‑term credit registry data become available, detailed registry data can improve credit risk models. - Connecting network analysis to bank stress tests is another macroprudential approach. - Bank stress test results could estimate potential contingent liabilities to the Government from credit guarantee programs, informing the Department of Finance. - Publication and institutional placement: - Once methodology established, BSP could publish high‑level results in semi‑annual FSR. - MaPSTs could be implemented within the macroprudential unit or collaboratively with economic research (for scenarios) and supervision sector (for bank testing). - BSP should adopt internal arrangements for conducting MaPSTs (see Box 1 distinctions between MiPST and MaPST). - Box 1 distinctions (summary): - MiPSTs: assure safety and soundness of individual entities; focus on balance sheets, capital, risk management; results used for remedial actions. - MaPSTs: assess impact of adverse scenarios on financial system capital, profitability, and ability to support economic activity; include macrofinancial feedbacks and contagion; can be top‑down (TD) or bottom‑up (BU) or both. - Suggestion: FSS could develop a bottom‑up MaPST (e.g., assess ICAAP results where banks report using own models under macro scenario). ### Data gaps and information sharing constraints - Data sharing under FSCC in place (bilateral agreements and MOAs e.g., with HLURB), but data gaps and lack of granularity constrain systemic risk analysis. - Specific data gaps: - Granular credit risk information, including a fully operational national credit registry. - Current collateral values and loan‑to‑value ratios. - Small and unlisted NFCs. - Household indebtedness surveys. - Detailed depositor information constrained by bank secrecy laws. - Progress and needs: - BSP’s new power to collect information from broader sectors and SEC’s digitalization initiatives are welcome but need operationalization. - SEC’s capacity and staffing need improvement for corporate data collection and management. ### Systemic vulnerabilities and macroprudential toolkit — key statistics and findings - Broad‑based credit boom vulnerabilities: - Credit‑to‑GDP gap in positive territory during several episodes and remained positive despite COVID‑19 because GDP decline pushes gap up. - Credit‑to‑GDP gap uses bank credit instead of total credit; bank credit covers NFC loans, which accounted around 85 percent of total credit to private nonfinancial sector. - Basel III leverage ratio of banking system is still well above regulatory minimum of five percent (minimum standard set by BSP). - Non‑performing loans at 2,53 percent as of 2020Q2. - NFC credit‑to‑GDP rose from around 30 percent in 2013 to 50 percent at end‑2020Q2. - BSP kept CCyB at zero percent despite strong pre‑crisis credit growth. - Recommendation: use credit‑to‑GDP gap with its 2 percent reference threshold (BCBS, 2010) as headline indicator but complement with debt‑to‑GDP ratios, current account balance, bank balance sheet indicators, credit growth, leverage of corporates and households. - Procedures to tighten/relax CCyB should be prepared (set thresholds, mechanisms for cross‑department views); OSRM could set list of indicators to monitor excessive lending and financial cycle. - BSP should reflect on an appropriate “normal” CCyB level; consider desirability of a positive default setting as in Czech, Ireland, and the UK. - Cross‑jurisdiction CCyB examples (data as of Dec 2020; Credit‑to‑GDP Gap data as of 2019Q4): - Denmark: Current Rate 1.0; Credit‑to‑GDP Gap -20.4 - United Kingdom: Current Rate 1.0; Credit‑to‑GDP Gap -16.6 - Sweden: Current Rate 2.5; Credit‑to‑GDP Gap -1.8 - Czech Republic: Current Rate 2.0; Credit‑to‑GDP Gap -1.7 - Ireland: Current Rate 1.0; Credit‑to‑GDP Gap -87.7 - Norway: Current Rate 2.5; Credit‑to‑GDP Gap -9.8 - Real estate vulnerabilities: - Nominal property price up by 180 percent from 2008Q1 to 2020Q3. - Real property prices increased by 30 percent between 2018Q2 and 2019Q4; property price growth plunged in 2020 with COVID‑19 impact. - Philippines receives about eight percent of GDP in remittance inflows per year (contextual factor). - Property price‑to‑income and price‑to‑rent ratios are quite high relative to other ASEAN countries. - Exposure to real estate loans relatively limited due to regulatory threshold of 20 percent of total loans for UKBs (temporarily raised to 25 percent upon COVID‑19). - Real estate loans largely commercial, accounting for 65 percent of total real estate loan. - Limit does not apply to TBs which provide one‑third of their loans to properties. - REST thresholds: banks must comply with REST stress test thresholds set at 10 and 6.0 percent of CAR and CET1/Tier1 for UKBs/TBs. - Condominium LTV treatment: if LTV is above 60 percent, the loan treated as unsecured for amount in excess of 60 percent (higher risk weights and provisioning). - Real estate corporates account for a small share of NFC debt held by firms with ICR below one in 2019; real estate companies relatively less vulnerable in NFC stress tests compared to sectors like energy, consumer discretionary, information technology and industrial sectors. - Household sector and mortgages: - Mortgages are a small share of total real estate loans; residential mortgage lending much smaller than NFC lending but continuously increasing. - Mortgage NPLs started to spike during pandemic; still lower than 5 percent but warrant supervisory attention. - Recommendation: consider phasing out property lending limit and require banks to hold more capital for concentration risk; use Pillar 2 review and stress testing to require capital add‑ons; consider time‑varying LTV and DTI and make current LTV limit time‑varying. - Data needs: realize a fully operational Credit Information Registry (CIC); collect data on loan collaterals, LTVs, household indebtedness, property prices (including commercial), price‑to‑income, and price‑to‑rent ratios. - Banking sector liquidity and FX funding: - LCR maintained around 170 percent during last five years; regulatory minimum 100 percent. - HQLA composition: government securities around 46 percent of total HQLA at end 2019. - Dollarization: 15 percent of deposits and 11 percent of loans are in FX. - Banks have limited offshore borrowings; outstanding borrowings usually offset by foreign assets. - FX liquidity stress tests show much lower median FX LCR than all‑currency LCR because FX liquidity concentrated in a few G‑SIB branches. - A stand‑alone FX LCR is not currently a regulatory requirement. - Recommendation: consider introducing an LCR for foreign currencies and deploy more risk‑sensitive tools to contain FX exposure risks; current NOP rule (lower of 20 percent of unimpaired capital or US$50 million) is not very risk sensitive. - NFCs and conglomerates interconnectedness: - Seven of the ten largest banks are related to local‑family‑owned mixed conglomerates; these banks hold about 60 percent of banking sector’s assets. - BSP network analysis suggests primary contagion among banks arises from common exposures to large conglomerates. - NFC external debt mostly domestic around 10 percent at end‑2019. - FX debt share (mostly Dollar) declining, current share 26 percent at end 2019; historically reached 60 to 70 percent of total debt. - Recommendations: close data gaps on small/unlisted NFCs, complete NFC debt by lender and currency, links among NFCs and conglomerates, and links between NFCs and banks; connect network analysis to bank stress tests and use payment system and other big data. ### Macroprudential aspects of regulatory forbearance - Pandemic forbearance measures: - Forbearance allowed banks to delay NPL recognition until end‑2021 and stagger credit loss recognition over up to five years (upon BSP approval). - Forbearance is unusually strong compared to other EMs; prolonged use could undermine banks’ economic capital and banking sector recovery. - Recommendations: - Regulatory changes including forbearance should be discussed comprehensively with all relevant departments to assess financial stability and macrofinancial feedbacks. - Allow the financial stability unit to comment on proposed measures. - Keep policies consistent with BSP mandate to maintain price and financial stability; consider implications for central bank independence and objectivity. ### Appendix I — Macroprudential Policy Toolkit in the Philippines (selected instruments and parameters) - Countercyclical capital buffer: - Applied on top of capital conservation buffer with size from 0 percent to 2.5 percent. - Buffer rate at 0 percent since introduction in 2018. - Any increase in CCyB effective 12 months after announcement; decreases effective immediately. - Capital conservation buffer: - Introduced 2013 by Circular No. 781 dated 15 January 2013. - UBs/KBs, their subsidiary banks and QBs mandated to set up CCB of 2.5 percent composed of CET1 capital. - BSP Memorandum No. M-2020-039 (4 May 2020) allows drawing down of 2.5 percent CCB without being considered in breach and gives time to restore buffers after COVID‑19. - Leverage ratio: - Minimum Basel III Leverage Ratio set at 5.0 percent (vis‑à‑vis BCBS 3.0 percent). - Implemented since 1 July 2018; applicable to all UBs/KBs and subsidiaries and QBs. - Uniform Stress Testing: - Introduced 2014; reference periods end‑June and end‑December annually. - Credit stress test imposes 20 percent and 50 percent write-offs. - Real estate loan (REL) limit: - Introduced 2008 set at 20 percent of bank’s total loan portfolio for UBs/KBs; Circular No. 1093 (20 August 2020) increases REL limits from 20 percent to 25 percent (net of interbank loans) amid pandemic. - Real Estate Stress Test (REST): - Introduced 2014; limits loss at 10 percent of CAR and 6.0 percent of CET1/Tier1 for UKBs/TBs. - Scenario: 25 percent write-off on REE and ROPA/NCAHS. - REST limits revised by Circular No. 1093 to exclude residential real estate loans for own occupancy and foreclosed real estate property. - Property loan to collateral value limit: - Set at 60 percent; loans above 60 percent treated as unsecured for risk weights and provisions. - Liquidity Coverage Ratio (LCR): - Phased‑in minimum LCR: 90 percent starting 01 January 2018 and 100.0 percent starting 01 January 2019 (Circular No. 905 dated 10 March 2016). - BSP Memorandum No. M-2020-039 (4 May 2020) allows drawing on liquid assets even if LCR falls below 100 percent and time to restore buffers after COVID‑19. - Net Stable Funding Ratio (NSFR): - Introduced June 2018; minimum level 100.0 percent since January 2019. - Capital surcharges for D‑SIBs: - HLA buckets require minimum CET1 increase by 1.5 percent to 2.5 percent of total RWA. - Net Foreign Exchange (FX) Positions: - Circular No. 561 dated 8 March 2007: allowable NOP is lower of 20 percent of unimpaired capital or US$50 million; excess must be settled daily. - FX Swaps/Derivatives measures: - Circular No. 740 (2011): higher risk weights for NDF transactions (15 percent capital charge from 10 percent). - Circular No. 790 (2013): limits on banks’ gross exposures to peso NDF transactions (20 percent and 100 percent of unimpaired capital for domestic banks and foreign bank branches respectively). - Prohibition on non‑residents in TDF and ODF: - Since July 2012, funds from non‑residents not accepted in TDF and ODF. ### Cross‑country comparison (selected measures) - Countercyclical capital buffer (above 0%): Philippines — No; Korea — No; Indonesia — No; Thailand — No; Malaysia — No. - Capital conservation buffer: Philippines — Yes; Korea — Yes; Indonesia — Yes; Thailand — Yes; Malaysia — Yes. - Leverage ratio limit: Philippines — Yes; Korea — Yes; Indonesia — Yes; Thailand — No; Malaysia — Yes. - Household sector tools (examples): cap on LTV — Philippines — Yes; cap on DTI — Philippines — No. - Liquidity tools: liquidity buffer requirements and NSFR — Philippines — Yes. - Note: Philippines has extensive capital flow management measures mostly applying to banks; many CFM measures do not apply to NBFIs and non‑financial corporations, which led to substantial informal FX and derivatives markets larger than formal markets. ### Main COVID‑19 policy measures (selected) - Monetary measures: - Policy rate reduced four times in 2020 by cumulative 175 bps to 2.25 percent. - Reserve requirement ratio lowered by 200 bps to 12 percent. - Purchase of PHP 300 billion government securities (~1.5 percent of 2019 GDP) via repos and secondary market transactions. - Distribution of PHP 20 billion as dividend to government despite amended BSP charter. - Inclusion of SME loans in compliance with reserve requirements; at end August 2020 SME loans accounted about 7½ percent of required reserves. - Regulatory measures: - 90‑day moratorium ending June 2020 on all bank loan repayments during Enhanced Community Quarantine; BSP estimates moratorium uptake covered about 70 percent of total loans. - Relaxation of asset classification and provisioning: exclusion from past due loan ratio until December 2021; staggered booking of provisioning over up to five years (subject to BSP approval). - Temporary reduction of MSME credit risk weights to 50 percent (below Basel III minimum 75 percent) subject to review end 2021. - Increase in limit on banks’ real estate loan share from 20 percent to 25 percent. - Fiscal measures (Bayanihan Act, March 2020): - PHP 205 billion cash aid (1.1 percent of 2019 GDP) for 18 million low‑income households for two months. - PHP 56 billion social protection (0.3 percent of 2019 GDP). - PHP 54 billion on medical response (0.3 percent of 2019 GDP). - PHP 120 billion (0.6 percent of 2019 GDP) credit guarantee for small businesses and agriculture support. - Further fiscal support under Bayanihan II Act (September 2020) amounting to 0.8 percent of 2019 GDP for vulnerable households and sectors. ### Recommendations (summary from Table 1; timing abbreviations: I = immediate (within one year); NT = near term (within 1–2 years); MT = medium term (within 3–5 years); LT = long term) - Institutional Arrangements: 1) Enhance collaboration within BSP to conduct essential macroprudential risk analyses and assure balanced decision‑making (¶14, 15, 51). — NT 2) Strengthen legal standing of FSPC to support BSP decision making on macroprudential issues (¶15). — NT 3) Consider providing the financial stability unit internally the same status as monetary policy and financial supervision sectors (¶16). — MT/LT 4) Allow the financial stability unit to consider a broader range of prudential tools for macroprudential purposes (¶17). — NT 5) Adopt internal arrangements for data and information sharing between sectors for financial stability analysis (¶18). — NT 6) Assure that the financial stability unit is sufficiently staffed to fulfill its objectives (¶19). — NT 7) Strengthen influence of FSCC decisions by adding a comply‑or‑explain mechanism and providing sectoral regulators with a financial stability objective (¶22, 23). — MT - Systemic Risk Monitoring: 8) Enhance macroprudential strategy framework by improving construction of the ultimate policy target and further elaborating the macroprudential toolkit (¶24). — NT 9) Introduce macroprudential stress testing exercises (¶27). — NT 10) Enhance scope and granularity of data collected for systemic risk monitoring purposes (¶28, 41, 49). — NT - Macroprudential Toolkit: 11) Expand macroprudential toolkit and establish operational procedures to set them in a more systemic risk‑based manner, including for property lending (such as LTV) and forex exposure (NOP based on capital) (¶33, 34, 41, 45). — NT 12) Consider implementing a positive “normal” CCyB buffer rate before imbalances start to build up (¶35). — MT 13) Consider adopting a foreign currency LCR (¶45). — NT 14) Strengthen BSP’s interconnectedness analysis, e.g., connect network analysis to bank stress tests and utilise other data sources (¶49). — NT _Italic: INTRODUCTION (1phlea2022003) — IMF technical note on the Philippines macroprudential framework._ ### INTRODUCTION __________________________________________________________________________________ 8 ### INTRODUCTION ### Overview - This technical note evaluates the Philippine macroprudential framework and provides recommendations to strengthen it. - It is the first evaluation of the framework for macroprudential arrangements, policies and tools in the context of a Financial Sector Assessment Program (FSAP). - The assessment is conducted based on the IMF guidance laid out in the Staff Guidance Note (IMF, 2014a), its background note (IMF, 2014b), and other IMF policy papers. - The note assesses current financial vulnerabilities in the Philippines, including those related to the on-going COVID-19 pandemic, and provides recommendations. ### Institutional framework — progress since the previous FSAP - The financial stability mandate is formally ascribed to the Bangko Sentral Ng Pilipinas (BSP) in the amended BSP Charter (Republic Act No. 11211), the New Central Bank Act (NCBA), signed in February 2019. - Key institutional developments since 2010: - In 2011 the Financial Stability Coordination Council (FSCC) was established to promote collaboration and coordination on financial stability issues among financial sector authorities and the DoF. The Treasury is invited but has no voting rights. - In 2017 the Office for Systemic Risk Management (OSRM), a dedicated financial stability unit within the BSP, was established; OSRM is headed by an Assistant Governor (AG) and acts as the secretariat for the FSCC. - BSP introduced elements of the Basel III framework including the Countercyclical Capital Buffer (CCyB) and a framework and capital buffers for Domestic-Systemically Important Banks (D-SIBs). The CCyB has been kept at zero percent since its introduction in December 2018. - In June 2018 the BSP published the first Financial Stability Report (FSR); the BSP is planning to publish the FSR semiannually and published the first second semester FSR for 2020 in November 2020. - In 2020 BSP created an internal decision-making body for financial stability, the Financial Stability Policy Committee (FSPC), to discuss financial stability issues and policy proposals before inter-agency discussion in the FSCC. - In June 2020 the FSCC published the Philippine Macroprudential Policy Strategy. ### Financial authorities and inter-agency cooperation - The BSP is the sole regulator with a financial stability mandate and objective in the Philippines financial system; the mandate is included in the NCBA (amended February 2019). - The BSP defines financial stability as: “Financial stability is the state when prospective systemic risks are mitigated so as to allow financial consumers, both individuals and corporate entities, to pursue viable economic goals while avoiding disruptions to the smooth functioning of the financial system that can negatively affect the rest of the economy”. - The FSCC’s Macroprudential Policy Strategy Framework (June 2020) articulates BSP’s macroprudential powers and how macroprudential policy interacts with other mandates; macroprudential policy focuses on limiting system-level risks over time and across market components, distinct from microprudential supervision. ### Key findings and vulnerabilities - Coordination and governance: - Collaboration and coordination within the BSP should be further enhanced to conduct essential macroprudential risk analysis and assure a balanced decision-making process across Monetary and Economic Sector, Financial Supervision Sector, and OSRM. - Macro-scenario stress testing—an essential tool for financial stability analysis—is missing despite strong staff capacity; the BSP should start macroprudential bank solvency stress tests with inputs from research (macro scenario), supervision (bank stress test), and OSRM (second-round effects and bank-NFC liquidity linkages). - Decision-making processes should ensure representation of monetary, microprudential, and macroprudential perspectives, with mechanisms to resolve conflicting views. Possible internal arrangements include an advisory committee for technical cooperation and expanded participation rights for OSRM senior staff. The legal standing and policy-making process of the FSPC need strengthening. - Macroprudential toolkit and operational procedures: - CCyB is the only prudential tool explicitly recognized as macroprudential for banks; many other tools exist (e.g., LTV, liquidity, FX positions) but have been set from microprudential perspectives and not explicitly calibrated in a countercyclical manner. - Operational procedures to set macroprudential tools in a systemic risk-based and countercyclical way are missing, including for CCyB. - Data and staffing gaps: - Data gaps constrain risk analysis: lack of granular credit risk data (including a fully operational national credit registry), current collateral values and loan-to-value ratios, small and unlisted nonfinancial corporations (NFCs), household indebtedness surveys, and detailed depositor information due to bank secrecy. - New BSP powers under the NCBA to collect information from broader economic sectors and SEC initiatives to digitalize NFC data are welcome but need operationalization. - OSRM appears understaffed relative to its allocated budget and evolving scope; BSP should periodically assess staffing adequacy. ### Recommendations (summary from Table 1) - Institutional Arrangements (NT = near term; MT = medium term; LT = long term) 1) Enhance collaboration within the BSP to conduct essential macroprudential risk analyses and assure a balanced decision-making process (¶14, 15, 51). — NT 2) Strengthen the legal standing of FSPC to support its role in BSP’s decision making process on macrorudential prudential issues (¶15). — NT 3) Consider providing the financial stability unit internally the same status as the monetary policy and financial supervision sectors (¶16). — MT/LT 4) Allow the financial stability unit to consider a broader range of prudential tools for macroprudential purposes (¶17). — NT 5) Adopt internal arrangements for data and information sharing between sectors for financial stability analysis (¶18). — NT 6) Assure that the financial stability unit is sufficiently staffed to fulfill its objectives (¶19). — NT 7) Strengthen the influence of FSCC decisions by adding a comply-or-explain mechanism and providing sectoral regulators with a financial stability objective (¶22, 23). — MT - Systemic Risk Monitoring 8) Enhance the macroprudential strategy framework by improving the construction of the ultimate policy target and further elaborating the macroprudential toolkit (¶24). — NT 9) Introduce macroprudential stress testing exercises (¶27). — NT 10) Enhance the scope and granularity of data collected for systemic risk monitoring purposes (¶28, 41, 49). — NT - Macroprudential Toolkit 11) Expand macroprudential policy toolkit and establish operational procedures to set them in a more systemic risk-based manner, including for property lending (such as LTV) and forex exposure (NOP based on capital) (¶33, 34, 41, 45). — NT 12) Consider implementing a positive “normal” CCyB buffer rate before imbalances start to build up (¶35). — MT 13) Consider adopting a foreign currency LCR (¶45). — NT 14) Strengthen BSP’s existing interconnectedness analysis, such as connecting the network analysis to bank stress tests and utilise other sources of data (¶49). — NT *I = immediate (within one year); NT = near term (within 1-2 years); MT = medium term (within 3-5 years)* *Source: INTRODUCTION (1phlea2022003) — IMF technical note on the Philippines macroprudential framework* ### 7. The NCBA requires the BSP to closely work with the National Government and other ### 7. The NCBA requires the BSP to closely work with the National Government and other ### Institutional framework and cross‑sectoral bodies - Relevant financial sector authorities: - Securities and Exchange Commission (SEC): national government regulatory agency with jurisdiction and supervision over corporate sector, capital market participants, and the securities and investment instruments markets; maintains the country’s register. - Insurance Commission (IC): national government regulatory agency supervising life and non-life insurance companies, reinsurance companies, mutual benefit associations, trusts for charitable uses, insurance intermediaries and other auxiliary services; issues and can suspend or revoke licenses to insurance agents, general agents, resident agents, underwriters, brokers, adjusters, and actuaries; has authority under R.A. No. 9829 (Pre-Need Code) and Executive Order 192 (series of 2015) and Health Maintenance Organizations (HMOs). - Philippine Deposit Insurance Corporation (PDIC): government-run corporation providing deposit insurance coverage to member banks; serves as principal liquidator and receiver of closed banks; membership is mandatory; scheme provides protection up to PHP 500,000 per depositor per bank. - Financial Stability Coordination Council (FSCC): - Formed with financial sector authorities and the Department of Finance (DoF). - Established in 2011; voluntary body; meets on a quarterly basis. - Members: Heads of the financial sector authorities and the DoF Secretary; BSP Governor chairs the FSCC. - Structure (as described): Executive Committee, Technical Secretariat (OSRM), Working Groups, Communications and Capacity‑Building Unit; Executive Committee: 5 Head of the agencies, 5 senior officials; decision and voting is per institution basis; meeting of Executive Committee every quarter. - Most strategic macroprudential decisions are discussed in the FSCC; OSRM plays as technical secretariat to support the FSCC. - Financial Sector Forum (FSF): - Formed in July 2004; made up of the BSP, SEC, IC and PDIC; meets six times per year. - Purely regulatory forum for supervisors to exchange views on immediate topics in financial sector regulation and supervision. - Chaired by the BSP. ### BSP internal governance, committees, and OSRM - Financial Stability Policy Committee (FSPC): - Responsible for macroprudential decision-making. - Established as a subcommittee of the Monetary Board (MB) in January 2020, replacing the previous Financial Stability Committee. - All MB members are members of the FSPC; meetings attended by Assistant Governor (AG) for financial stability and Deputy Governors (DGs) responsible for monetary policy and financial sector supervision. - No external members; meets every two months. - FSCC agenda items are pre-discussed in the FSPC; OSRM provides technical support and discussion materials. - Office for Systemic Risk Management (OSRM): - Established in 2018; headed by an AG; reports directly to the Governor; does not belong to a specific BSP sector. - Publishes the Financial Stability Review (FSR); first FSR published in June 2018; FSR is published semi‑annually. - Performs analytical work and financial stability policy preparation. - Monetary Board (MB) decision-making: - Monetary policy and prudential supervision decisions take place in the MB; no separate decision-making committees. - Charter allows DG of each sector to attend MB meetings with “the right to be heard” (DGs have no voting rights). - Financial stability is represented by the Governor and not by the Assistant Governor heading OSRM. - BSP sector structure noted: - There are three sectors in the BSP: (i) Monetary and Economics Sector, (ii) Financial Supervision Sector, and (iii) Corporate Services Sector. In February 2021 the BSP created a fourth sector, the Payments and Currency Management Sector. ### Key findings on willingness to act (internal coordination and status of OSRM) - Internal decision‑making could be enhanced by improving coordination between the monetary and supervision sectors and OSRM at technical and senior levels; recommend mechanisms to resolve conflicting policy views. - Practical suggestions and observations: - FSPC could be supported by an advisory committee to facilitate technical‑level cooperation, similar to the arrangement for monetary policy. - AG responsible for financial stability could be given broader access to MB meetings when monetary policy and financial supervision issues/proposals are discussed (similar to DGs). - The FSPC legal standing and role should be set clearly to support BSP decision‑making on financial stability and macroprudential issues; an internal Charter clarifying standing and role of the FSPC could be adopted. - In the medium to longer term, consider providing the financial stability unit internally the same status as the monetary policy and financial supervision sectors so it becomes the point of reference for systemic risk, macroprudential and financial stability issues. - Prudential tool responsibilities and coordination: - Currently OSRM’s prudential tools appear limited to the countercyclical capital buffer (CCyB); Financial Supervision Sector (FSS) is responsible for other prudential tools. - Recommendations: - BSP should not divide the right to use prudential tools between FSS and OSRM; allow both to develop views and policy proposals from microprudential and macroprudential perspectives. - FSS should focus on institution‑specific risk; OSRM should focus on time‑varying (cyclical) and cross‑sectional systemic risks with clear activation and relaxation criteria. - Establish a mechanism to push strong collaboration and coordination among FSS and OSRM when formulating and calibrating prudential tools; ensure each sector has sufficient access to data and ability to convey views when proposals are discussed. - Data and information sharing: - No formal data and information exchange between OSRM and other BSP departments. - For specific information (e.g., stress test results), OSRM relies on public sources that only cover aggregate FSS results. - OSRM systemic risk analysis is mainly shared through the published FSR; current silo approach undermines BSP’s capability to develop a comprehensive picture of financial system stability. - Recommendation: put in place internal arrangements for data and information sharing between sectors and OSRM. - Staffing: - OSRM appears understaffed compared to its allocated budget and has experienced staff turnover. - Even when staffed according to budget, integrating new staff and building experience takes time. - Recommendation: BSP should periodically assess whether OSRM staffing is adequate given evolving tasks. ### Ability to act (legal powers and data collection) - BSP powers: - BSP is empowered to issue, amend, or revoke regulations to implement macroprudential policy instruments; has powers to control and calibrate macroprudential tools. - Publication of Macroprudential Strategy Framework under FSCC could raise accountability questions about who is effectively accountable for macroprudential power and mandate; inclusion of FSCC in publications (including the FSR) was intended to involve all agencies but could create perception issues. - NCBA data collection powers: - NCBA bestows the BSP with expanded powers to collect information from all persons and entities (including from the government and government controlled entities) for statistical and policy development purposes. - This should increase BSP capability for more comprehensive and accurate analysis, including financial stability analysis. - The new powers still need to be operationalized. ### Effective interagency coordination and FSCC influence - FSCC limitations and recommendations: - FSCC underpinned by a formal MoU (2014) but is voluntary; has no legal framework for decision‑making and no formal powers, not even to make recommendations. - Implementation of FSCC decisions depends on each agency imposing decisions according to their area of responsibility. - Recommendation: FSCC should obtain powers (and a clear Charter or Terms of Reference) to make formal recommendations to member agencies with a comply‑or‑explain mechanism to mitigate potential inaction bias while preserving institutional autonomy. - Note: Post assessment, on 06 July 2021, the Office of the President of the Philippines issued Executive Order No. 144 s. 2021, which institutionalized the FSCC. The Executive Order specifies in section 3 the purpose and objectives of the FSCC to enhance financial system stability and formulate a Macroprudential Policy Strategy Framework. - Sharing a financial stability objective: - Providing a financial stability objective to the IC, SEC, and PDIC could strengthen FSCC’s influence and coordination. - Shared objective would encourage agencies to consider system‑wide stability, not only safety and soundness of individual institutions, and help address regulatory arbitrage and shadow banking risks. - Important to keep functions and powers segregated between macroprudential and microprudential authorities to avoid confusion and maintain independence. ### Systemic risk monitoring and macroprudential strategy - Macroprudential Strategy Framework (June 2020): - Could be improved; emphasis on GaR (Growth at Risk) as primary measure seems inconsistent with BSP practice, where BSP uses broader measures. - Strategy states BSP uses Growth at Risk as the ultimate target of macroprudential policies; GaR constructed using macro and market variables that do not include some systemic risk indicators the BSP already uses. - Observations: - GaR alone would not capture different types of systemic vulnerabilities and risks. - GaR useful for calibrating broad‑based tools (e.g., CCyB) but other tools require wider and different indicators. - Recommendation: construct the ultimate target of macroprudential policy according to the objective of mitigating systemic risk and link target and monitoring processes accordingly. - Strategy framework could elaborate the macroprudential toolkit to improve communication of how macroprudential differs from microprudential policy. - OSRM corporate stress tests and systemic indicators: - OSRM conducts two tests for non‑financial corporates (NFCs): - Debt‑to‑Earnings Borrowers Test (DEBT): strengthens systemic risk surveillance amid debt accumulation and assesses capacity of individual and corporate borrowers to pay in periods of rising interest rates and peso depreciation. - Borrowers Interconnectedness Index (BII): identifies main common borrowers/debtors of the banking system. - Tests cover corporates’ performance (sales, profit, funding, liquidity) linked to macroeconomic conditions. - OSRM also conducts interconnectedness and contagion analysis of corporates and banks, covering direct exposures among corporates and between corporates/conglomerates and banks. - OSRM is developing interconnectedness analysis among banks using payment system data. - Systemic risk monitoring toolkit elements noted: - Interconnectedness analysis, contagion risk model - Excess credit analysis - DEBT and BII - Delta CoVaR and MES - GaR Framework variables include Money supply, market prices, a cross‑border yield differential, local returns of equity. *Source: 1phlea2022003 - 7. The NCBA requires the BSP to closely work with the National Government and other* ### 26. Stress testing for banks is conducted by the FSS with the objective to assess the ### 26. Stress testing for banks is conducted by the FSS with the objective to assess the resilience of individual banks. ### Current stress testing framework and exercises - Stress testing consists of single factor sensitivity tests and does not cover a comprehensive stress scenario that captures dynamics in macroeconomic conditions. - Results are used mostly for supervisory actions, and the aggregate results are published periodically. - Main single factor stress tests: - Real Estate Stress Test (REST) for Real Estate Exposure (REE): - Single factor shock of a 25 percent write-off rate on REE and Real and Other Properties Acquired (ROPA)/Non-Current Assets Held for Sale (NCAHS). - Hurdle rate of 10 percent of the CAR and 6.0 percent of CET1, on both solo and consolidated basis. - Broad coverage: all residential and commercial real estate loans as well as real estate investments, ROPA and NCAHS. - Conducted quarterly and covers all UKBs and TBs. - Uniform Stress Testing (credit and market risks): - Credit stress test: imposes a 20 percent and 50 percent write-off on the net carrying value of credit exposures. - Market risk test: covers movements in interest rates and foreign exchange rates, based on simplified assumptions. - Coverage: credit risk exercise covers all UKBs and TBs; market risk exercise covers all UKBs and their subsidiary TBs, as well as stand-alone TBs with total assets of at least 5 PHP billion or total capital of at least 1 PHP billion. - Conducted annually with reference periods of end-June and end-December. ### Recommendations to introduce macroprudential / macro-scenario stress testing - The BSP should start running macro-scenario stress testing that focus on systemic risk analysis to strengthen financial stability analysis. - Rationale and scope: - Macroprudential stress tests (MaPSTs) cover a comprehensive set of macro scenarios and are currently missing despite available strong staff capacity. - Exercises could focus on systemic parts of the financial system such as UKBs. - Could examine effects of a common macro scenario relevant at the particular point in time and include some form of macro-financial feedback effects. - Could link corporate sector stress test results to banks’ credit risks from NFC loans (for example, use ICR-based NFC stress test results to calculate stressed PDs for banks’ loan portfolio instead of PDs estimated using banks’ NPL transition data). - When long-term credit registry data become available, detailed registry data could be used to further improve accuracy of credit risk models. - Connecting network analysis to bank stress tests is another approach to make tests more macroprudential. - Bank stress test results could be used to estimate potential contingent liabilities to the Government from various credit guarantee programs it offers, informing the Department of Finance. - Publication and institutional placement: - Once methodology is established, BSP could consider publishing high-level results in its semi-annual Financial Stability Report. - Macroprudential stress tests could be implemented within the macroprudential unit or in collaboration with the economic research department (for scenarios) and the supervision sector (for implementing the bank stress testing part). - BSP should adopt necessary internal arrangements for conducting macroprudential stress-tests (see Box 1). ### Box 1 — Institutional arrangements and distinctions between MiPST and MaPST - Microprudential stress tests (MiPSTs): - Aim to assure safety and soundness of individual financial entities. - Encompass examination of banks’ balance sheets focusing on capital and regulatory ratios, and assessments of risk management practices. - Results used to identify deficiencies and warrant remedial efforts by banks, including additional safety buffers. - Macroprudential stress tests (MaPSTs): - Assess impact of adverse scenarios on the financial system’s capital, profitability, and ability to support economic activity. - Focus on system-wide effects, including risk amplification via macrofinancial feedback effects and contagion across entities and markets. - Provide quantitative and qualitative information on “reactions of the system.” - Can be top-down (TD) or bottom-up (BU), or both: - TD tests: common scenarios, rules to measure risks, models, behavioral rules for banks; usually carried out by a single entity. - BU tests: use common scenario with individual bank models and granular portfolio data; account for individual banks’ reactions. - Methodological frameworks set by supervisory body to ensure consistency and comparability across TD and BU. - Suggestion: - FSS could develop a bottom-up macroprudential scenario stress test (for example, to assess banks’ Internal Capital Adequacy Assessment Programs where banks report results using their own models under the macro scenario). ### Data gaps and information sharing constraints - Data sharing arrangements under the FSCC are in place (including bilateral agreements and MOAs such as with HLURB for real estate developer data), but data gaps and lack of granular data constrain systemic risk analysis and monitoring. - Specific data gaps constraining risk analysis: - Lack of information on granular credit risk, including a fully operational national credit registry, current collateral values and loan-to-value ratios, small and unlisted NFCs, household indebtedness and survey, and detailed depositor information. - Individual depositor information is covered by bank secrecy laws and therefore not available for microprudential supervision or macroprudential surveillance. - Progress and needs: - New BSP power to collect information from broader economic sectors and SEC initiatives to digitalize more comprehensive NFC data are welcome progress. - SEC’s capacity and staffing needs to be improved to foster corporate data collection and management. ### Systemic risks and macroprudential toolkit — summary of key vulnerabilities and recommendations - Assessment framework: - Systemic vulnerabilities assessed using multiple indicators and FSAP financial sector risk analysis, following Staff Guidance Note on Macroprudential Policy (IMF, 2014a). - Vulnerabilities from broad-based credit booms: - Credit indicators: - Credit-to-GDP gap has been in positive territory during several episodes and remained positive despite the COVID-19 pandemic because the decline of GDP growth pushes the gap to increase. - Credit-to-GDP gap in the Philippines uses bank credit instead of total credit; bank credit covers NFC loans, which accounted around 85 percent of total credit to private nonfinancial sector. - Basel III leverage ratio of the banking system is still well above the regulatory minimum of five percent (the minimum standard set by the BSP). - Non-performing loans are at 2,53 percent as of 2020Q2. - Policy buffers and CCyB: - BSP kept the countercyclical capital buffer (CCyB) at zero percent despite strong pre-crisis credit growth. - NFC credit-to-GDP rose from around 30 percent in 2013 to 50 percent at the end of the second quarter of 2020. - Additional capital buffers would have been useful and broadened policy options during the COVID-19 crisis; releasing previously built buffers might have avoided perceived need for forbearance and mitigated second-round GDP growth impacts of solvency shocks. - Recommendation: BSP should consider a more comprehensive approach to determine when CCyB should be relaxed or tightened, using the credit-to-GDP gap with its 2 percent reference threshold (BCBS, 2010) as a headline indicator but complemented by additional indicators (debt-to-GDP ratios, current account balance, bank balance sheet indicators, credit growth, leverage level of corporates and households). - Basel Committee guidance: definition of credit should ideally include all credit extended to households and other non-financial private entities. - Procedures to tighten and relax CCyB should be prepared: set thresholds, mechanisms to receive views from relevant departments, and OSRM could set a list of indicators to monitor excessive lending and financial cycle. - BSP should reflect on the appropriate level of the “normal” CCyB buffer going forward; consider desirability of a positive default setting as in Czech, Ireland, and the UK. - Box 2 (examples of cross-jurisdiction CCyB implementation) — selected jurisdiction data: - Denmark: Current Rate (in percent) 1.0; Credit-to-GDP Gap (percent of GDP) -20.4 - United Kingdom: Current Rate (in percent) 1.0; Credit-to-GDP Gap (percent of GDP) -16.6 - Sweden: Current Rate (in percent) 2.5; Credit-to-GDP Gap (percent of GDP) -1.8 - Czech Republic: Current Rate (in percent) 2.0; Credit-to-GDP Gap (percent of GDP) -1.7 - Ireland: Current Rate (in percent) 1.0; Credit-to-GDP Gap (percent of GDP) -87.7 - Norway: Current Rate (in percent) 2.5; Credit-to-GDP Gap (percent of GDP) -9.8 - Source: BIS, IMF database. Data as of Dec 2020; Credit-to-GDP Gap data as of 2019Q4. - Vulnerabilities from real estate sector: - Property prices: - Nominal property price up by 180 percent during the period from 2008Q1 to 2020Q3. - Relative to GDP, property prices were quite stable and then increased significantly between 2018Q2 and 2019Q4 when real property prices increased by 30 percent. - With the impact of the COVID-19 pandemic the growth of property prices has plumped in 2020. - The Philippines receives about eight percent of GDP remittance inflows per year (contextual factor). - Indicators of misalignment: - Conventional property indicators (property price index, property price index to GDP ratio, property price growth, and growth of property price index to GDP) showed significant deviation from long-term trend, particularly during 2018Q2 to 2019Q4. - Property price-to-income and price-to-rent ratios are quite high relative to other ASEAN countries. - The analysis is based on property prices from before the COVID-19 pandemic. - Spillover risk to banking system: - Exposure to real estate loans is relatively limited because of a regulatory threshold of 20 percent of total loans applicable to UKBs (raised temporarily to 25 percent upon COVID-19). - Real estate loans are largely commercial, accounting for 65 percent of total real estate loan. - The limit does not apply for TBs which provide one-third of their loans to properties. - Condominium purchase contract practices and LTV treatment: - Condominium purchase contracts often structured to limit risks to developers and banks. - If LTV is above 60 percent, the loan is treated as unsecured for the amount in excess of 60 percent which requires higher risk weights and provisioning. - REST threshold: - Banks should comply with REST stress test thresholds currently set at respectively 10 and 6.0 percent of CAR and CET1/Tier1 for UKBs/TBs. - Real estate corporates: - Balance sheets of real estate corporates appear sound; real estate corporates account for a small share of NFC debt held by firms with ICR below one in 2019. - NFC stress tests show real estate companies are relatively less vulnerable to the current crisis, despite weak earnings forecasts—their shocks to operating income and interest payment and regression-based prediction of ICRs at end-2020 are relatively well absorbed, with lower increases in debt-at-risk (ICR =< 1) and firm-at-risk (ICR =< 1) shares compared to sectors such as energy, consumer discretionary, information technology and industrial sectors. _Italic: IMF Philippines FSAP chapter content unit 1phlea2022003 (excerpts shown)._ ### 40. On the household sector, mortgages only contribute a small share of total real estate ### 40. On the household sector, mortgages only contribute a small share of total real estate loans, suggesting limited risk to the banks ### Household sector and mortgage exposures - Mortgages contribute a small share of total real estate loans; residential mortgage lending is much smaller than NFC lending but has been continually increasing. - Financing outside the banking sector (self financing from cash inflows from offshore workers and financing from construction companies) could explain the low share and slow growth of mortgages. - Mortgage exposures appear prudent: NPLs decreasing in line with GDP growth until end 2019. - Mortgage NPLs started to spike during the pandemic; although still lower than 5 percent, this spike warrants supervisory attention and close monitoring. - The temporary relaxation of the real estate limit should be implemented with consideration of the upside risk of mortgage NPLs. ### Monitoring and enhancement of prudential tools for housing - Recommendation: The BSP should consider modernization of its policy toolkit to make it more risk-sensitive and more time-varying. - Consider phasing out the property lending limit and instead require banks to hold more capital for concentration risk (not only for sectoral, but also for other kinds of concentrations). - Use the Pillar 2 review and micro- and macroprudential stress-testing exercises as tools to require any necessary capital add-ons. - Consider time-varying tools such as LTV and DTI; make the current limit for “LTV” time-varying to capture countercyclical characteristics. - Incorporate property price developments into tools because property price is a good indicator of economic and financial cycle. - Continue continuous mapping and monitoring of the real estate sector, including price and financing sources, to identify appropriate tools. - When property price is affected by abundant non-bank financing, consider other tools such as property tax. - BSP should continue monitoring sources and trends of non-bank financing and conduct analysis on property price, construction companies' performance, and links to conglomerates and banks. - Increase scope and granularity of data to provide more time-varying and risk-sensitive tools and conduct comprehensive monitoring. - Realize a fully operational Credit Information Registry (CIC, public centralized credit registry). - Collect data on loan collaterals, loan-to-value ratios, household indebtedness, property prices (including commercial), price-to-income, and price-to-rent ratios. ### Banking sector liquidity and FX funding vulnerabilities - The banking sector liquidity buffer is quite high and relatively stable: LCR is maintained around 170 percent during the last five years, well above the regulatory minimum of 100 percent. - High-quality liquid assets composition: government securities are the most dominant holding (around 46 percent of total HQLA at end 2019). - Bank funding profile varies; UKBs are mostly funded by deposits, with corporate and retail deposits contributing equally to total deposits. - FX risks and statistics: - Dollarization: 15 percent of deposits and 11 percent of loans are in FX. - Banks have limited offshore borrowings; outstanding borrowings are usually offset by foreign assets. - Banks may experience FX liquidity stress from NFCs that may seek FX loans or liquidate deposits in case of capital outflow events. - Liquidity stress testing: - Most banks exceed the 100 percent benchmark for LCR; only a few banks (mainly branches of foreign banks) fall somewhat below the requirement. - For FX liquidity stress tests, dispersion is more pronounced with much lower median FX LCR than all-currency LCR because FX liquidity is concentrated in a few G-SIB branches. - A stand-alone FX LCR is currently not a regulatory requirement. ### Recommendations on FX exposure and liquidity - Deploy more risk-sensitive tools to contain FX exposure risks. - The current NOP rule (limit the NOP to be the lower of 20 percent of their unimpaired capital or US$50 million) is not very risk sensitive and does not capture bank-specific risk factor variations; it limits banks with larger capacity from contributing more to FX trading in the system. - Consider introduction of LCR for foreign currencies because FX liquidity is largely concentrated in a few branches of foreign banks and some banks have insufficient liquidity buffers in foreign currencies. ### Vulnerabilities from Non-Financial Corporates (NFCs) and conglomerates - NFCs are deeply interconnected with the financial system through “mixed” conglomerate structures including NFCs and financial institutions. - Seven out of the ten largest banks are related to local-family-owned mixed conglomerates; these banks hold about 60 percent of the banking sector’s assets. - BSP network analysis suggests primary contagion among banks arises from common exposures to large conglomerates. - International spillovers: - Most international spillovers are likely to stem indirectly from NFCs’ international borrowing, trade, and declines in financial asset prices. - International remittance inflows are significant (about eight percent of GDP annually), but may have little impact on banks’ FX deposits because they can be credited to banks only in pesos in most cases. - NFC external debt and FX exposure: - NFC debt is mostly domestic, around 10 percent at end-2019. - FX debt share (mostly Dollar denomination) declining, current share of 26 percent at end 2019. - The share of FX debt is historically volatile, with the highest figure reaching 60 to 70 percent of total debt. - Recommendations to strengthen BSP analysis on corporates and conglomerates: - Continue closing data gaps and strengthen monitoring risks from FX borrowing and conglomerate risks; requires collaboration with CIC, Government, FSF and interdepartments within BSP. - NFC data gaps include data of small and unlisted NFCs, complete and accurate NFC debt by lender and currency, links among NFCs inside and between conglomerates, and links between NFCs and banks. - Strengthen BSP’s interconnectedness analysis: - Connect network analysis to bank stress tests. - Improve interconnectedness analysis using more data sources such as payment system and other big data. ### Macroprudential aspects of regulatory forbearance - During the pandemic, regulatory relief and forbearance were applied to support banks and debtors. - Forbearance included allowing banks to delay NPL recognition until end-2021 and credit loss recognition gradually over a maximum period of five years (upon BSP’s approval). - This form of forbearance is unusually strong compared to other EMs and, when used significantly, could undermine banks’ economic capital for an extended period. - From a macro perspective, prolonged forbearance could undermine banking sector recovery due to long-standing bad debt and have negative medium-term impacts on financial stability. - Recommendations on forbearance policy design and governance: - Regulatory changes, including forbearance, should be discussed comprehensively with all relevant departments to have a complete picture of impacts, including financial stability and macrofinancial feedbacks. - Consider all policy options, systemic effects, and unintended consequences; allow the financial stability unit to comment on proposed measures. - BSP should keep policies consistent with its mandate to maintain price and financial stability; policies aimed at economic recovery and growth should be carefully considered given possible impacts on central bank independence and objectivity. *Source: IMF staff analysis in the referenced chapter.* ### Appendix I. Macroprudential Policy Toolkit in the Philippines ### Appendix I. Macroprudential Policy Toolkit in the Philippines ### Macroprudential instruments and descriptions - Countercyclical capital buffer - Applied on top of the capital conservation buffer with size from 0 percent to 2.5 percent. - The buffer rate is at 0 percent since it was introduced in 2018. - Any increase in the CCyB rate shall be effective 12 months after its announcement. Decreases shall be effective immediately. - Capital conservation buffer - Introduced in 2013 by Circular No. 781 dated 15 January 2013. - UBs/KBs, their subsidiary banks and QBs, are mandated to set up a CCB of 2.5 percent composed of CET1 capital. - Banks that do not meet the 2.5 percent CCB will be restricted from distributing earnings. - BSP Memorandum No. M-2020-039 (4 May 2020) allows covered banks/QBs that draw down their 2.5 percent minimum CCB to not be considered in breach of the Basel III risk-based capital adequacy framework and gives a reasonable time to restore buffers after the COVID-19 crisis. - Leverage ratio - Minimum Basel III Leverage Ratio set at 5.0 percent (vis-à-vis the 3.0 percent of the BCBS). - Implemented effectively since 1 July 2018. - Applicable to all UBs/KBs and their subsidiary banks and QBs. - Uniform Stress Testing - Introduced in 2014 to require banks to have sufficient capital level to absorb risks. - Reference period: end-June and end-December annually. - Covers credit risk and market risk. - Credit stress test imposes a 20 percent and 50 percent write-off on the net carrying value of balance sheet exposures. - Market risk stress test covers movements in interest rates and foreign exchange based on simplified assumptions. - Real estate loan (REL) limit - Introduced in 2008 and set at 20 percent of a bank’s total loan portfolio. - Applies to all UBs/KBs and covers commercial real estate loans for acquisition and development of land and/or construction of buildings and structures, including housing units for sale/lease for income-generating purposes. - BSP Circular No. 1093 (20 August 2020) increases REL limits from 20 percent to 25 percent of total loan portfolio, net of interbank loans, to support growth in productive sectors amid the pandemic and encourage bank lending to households for acquisition or construction of residential real estate. - Real Estate Stress Test (REST) / Limit for Real Estate Exposure (REE) - Introduced in 2014 for UBs/KBs and TBs. - Limits loss from real estate stress test at 10 percent of the CAR and 6.0 percent of CET1 (for UBs/KBs and their subsidiary TBs)/Tier 1 ratio (for TBs that are not subsidiaries of UBs/KBs), on both solo and consolidated basis. - Stress scenario: 25 percent write-off rate on REE and Real and Other Properties Acquired (ROPA)/Non-Current Assets Held for Sale (NCAHS). - Covers all residential and commercial real estate loans, real estate investments, ROPA and NCAHS (broader than REL limit). - REST limits are not absolute; banks failing to meet them must explain exposures and may face heightened supervisory response if breaches persist. - BSP Circular No. 1093 (20 August 2020) revised computation for REST limits to exclude residential real estate loans to individuals for own occupancy and foreclosed real estate property. - Property loan to collateral value limit - Set at 60 percent. - Similar to loan-to-value (LTV) ratio with static limit. - If collateral ratio is above 60 percent, the loan is treated as unsecured for risk weights and provisions. - Liquidity Coverage Ratio (LCR) - Phased-in minimum LCR: 90 percent starting 01 January 2018 and 100.0 percent starting 01 January 2019 under Circular No. 905 dated 10 March 2016. - Coverage expanded under Circular No. 996 dated 8 February 2018 to include banks and QBs that are subsidiaries of UBs/KBs. - BSP Memorandum No. M-2020-039 (4 May 2020) allows covered banks/QBs to draw on liquid assets even if it causes LCR to fall below the 100 percent minimum and provides reasonable time to restore buffers after the COVID-19 crisis. - Net Stable Funding Ratio (NSFR) - Introduced in June 2018 for UBs/KBs and their subsidiary banks and QBs. - Minimum level set as 100.0 percent on both solo and consolidated basis since January 2019. - Capital surcharges for Systemically Important Institutions (D-SIBs) - Identified D-SIBs categorized into HLA buckets required to increase minimum CET1 by 1.5 percent to 2.5 percent of total risk-weighted assets. - D-SIBs required to develop and maintain recovery plans to restore viability in cases of significant deterioration. - Applied on a consolidated basis to UBs/KBs, their subsidiary banks and QBs, and branches of foreign banks. - Net Foreign Exchange (FX) Positions - Under Circular No. 561 dated 8 March 2007, allowable Net Open FX Position is the lower of 20 percent of unimpaired capital or US$50 million. - Any excess of the allowable limit must be settled daily. - Banks must report daily consolidated FX positions including positions of branches/offices, subsidiaries, affiliates, and related entities engaged in FX trading. - FX Swaps or Derivative Positions - Introduced in 2011 and 2013 to curb speculative attacks on the Philippine Peso by imposing limits and higher risk weights on Non-Deliverable Forward (NDF) transactions. - Circular No. 740 (2011): higher risk weights for NDF transactions (15 percent capital charge from 10 percent). - Circular No. 790 (2013): limits on banks’ gross exposures to peso NDF transactions (20 percent and 100 percent of unimpaired capital for domestic banks and foreign bank branches, respectively). - Prohibition against non-residents from investing in the Term Deposit Facility (TDF) and Overnight Deposit Facility (ODF) - Since July 2012, BSP limited participation and placements in TDF and ODF by funds obtained directly or indirectly from non-residents. - Prohibition maintained: funds from non-residents not accepted in TDF and ODF because these instruments manage domestic liquidity and should not be used for opportunistic non-resident-funded investments. ### Cross-country comparison: selected macroprudential measures (Appendix II) - Broad-based tools (banking sector) - Countercyclical capital buffer (above 0%): Philippines — No; Korea — No; Indonesia — No; Thailand — No; Malaysia — No. - Capital conservation buffer: Philippines — Yes; Korea — Yes; Indonesia — Yes; Thailand — Yes; Malaysia — Yes. - Limit on leverage ratio: Philippines — Yes; Korea — Yes; Indonesia — Yes; Thailand — No; Malaysia — Yes. - Household sector tools - Household sector capital requirement: Philippines — No; Korea — No; Indonesia — No; Thailand — Yes; Malaysia — Yes. - Cap on loan-to-value ratio: Philippines — Yes; Korea — Yes; Indonesia — Yes; Thailand — Yes; Malaysia — Yes. - Cap on debt-service to income ratio: Philippines — No; Korea — Yes; Indonesia — No; Thailand — No; Malaysia — No. - Cap on household credit growth: Philippines — No; Korea — No; Indonesia — No; Thailand — No; Malaysia — No. - Fiscal measures to contain systemic risks: Philippines — No; Korea — No; Indonesia — No; Thailand — No; Malaysia — Yes. - Corporate sector tools - Corporate sector capital requirement: Philippines — No; Korea — No; Indonesia — No; Thailand — No; Malaysia — N.A. - Loan/eligibility restrictions: Philippines — Yes; Korea — No; Indonesia — Yes; Thailand — N.A.; Malaysia — N.A. - Exposure caps on corporate credit: Philippines — Yes; Korea — No; Indonesia — No; Thailand — No; Malaysia — N.A. - Liquidity tools (banking sector) - Liquidity buffer requirements: Philippines — Yes; Korea — Yes; Indonesia — Yes; Thailand — Yes; Malaysia — Yes. - Stable funding requirements: Philippines — Yes; Korea — Yes; Indonesia — Yes; Thailand — Yes; Malaysia — Yes. - Limits on foreign exchange positions: Philippines — Yes; Korea — Yes; Indonesia — Yes; Thailand — Yes; Malaysia — No. - Tools for systemic liquidity risk and nonbank sector - Asset management industry: Philippines — No; Korea — Yes; Indonesia — No; Thailand — Yes; Malaysia — No. - Pension funds: Philippines — No; Korea — Yes; Indonesia — No; Thailand — N.A.; Malaysia — No. - Insurance companies: Philippines — No; Korea — Yes; Indonesia — No; Thailand — N.A.; Malaysia — No. - Tools for SIIs and interconnectedness - Capital surcharges for SIIs: Philippines — Yes; Korea — Yes; Indonesia — Yes; Thailand — Yes; Malaysia — No. - Exposure limits/additional risk weights between financial institutions: Philippines — No; Korea — Yes; Indonesia — Yes; Thailand — No; Malaysia — No. - Note: The Philippines has extensive capital flow management (CFM) measures on FX transactions and borrowings—mostly to banks. Many CFM measures do not apply to NBFIs and non-financial corporations or transactions in cash or in foreign soil (that are not repatriated), which led to substantial informal FX and derivatives markets larger than formal markets. ### Main policy measures to mitigate the impact of COVID-19 (Appendix III) - Monetary measures - Reduction of the policy rate four times in 2020 by a cumulative 175 bps to 2.25 percent. - Lowering of the reserve requirement ratio for banks by 200 bps to 12 percent. - Relaxation of requirements for accessing the rediscount window. - Purchase of PHP 300 billion worth government securities (about 1.5 percent of 2019 GDP) through a repurchase agreement with the government and secondary market transactions. - Distribution of PHP 20 billion as dividend to the government—even though such distributions are no longer required under the recently amended new BSP charter. - Inclusion of SMEs loans in the calculation of the compliance with reserve requirements to encourage banks to maintain SME loans; at end August 2020, SME loans accounted about 7½ percent of required reserves. - Regulatory measures - 90-day moratorium (ending June 2020) on all bank loan repayments during the Enhanced Community Quarantine period (part of the Bayanihan Act, March 2020). BSP estimates uptake of the moratorium covered about 70 percent of total loans. Congress approved in August 2020, taking effect September 15, another 60-day moratorium (part of the Bayanihan Act II). - Relaxation of asset classification and provisioning requirements: - Exclusion from the past due loan ratio of loans to affected borrowers until December 2021. - Staggered booking of provision for credit losses over a maximum period of five (5) years, subject to prior BSP approval. - Temporary relaxation of reporting requirements and penalties on required reserves and single borrower limits (subject to review March 2021). - Temporary relaxation allowing banks to reclassify available-for-sale securities valued mark-to-market to held-to-maturity securities valued at book value (expires September 30, 2020). - Temporary reduction of MSME credit risk weights to 50 percent (below the Basel III minimum of 75 percent) subject to review end 2021. - Increase in the limit on banks’ real estate loan share from 20 percent of their total loan portfolio (net of interbank loans) to 25 percent. - Exchange rate and balance of payments measure - BSP relaxed documentary and reporting rules for FX operations. - Fiscal measures - Public response under the Bayanihan Act (March 2020) comprised four pillars: - PHP 205 billion cash aid program (1.1 percent of 2019 GDP) for 18 million low-income households for a period of two months. - PHP 56 billion social protection measures for vulnerable workers, including displaced and overseas Filipino workers (0.3 percent of 2019 GDP). - PHP 54 billion on COVID-19-related medical response (0.3 percent of 2019 GDP). - PHP 120 billion (0.6 percent of 2019 GDP) credit guarantee for small businesses and support to the agriculture sector. - Further fiscal support under the Bayanihan II Act (September 2020) to vulnerable households and to workers and businesses in hard-hit industries such as agriculture, transportation, and tourism (0.8 percent of 2019 GDP). *Appendix I. Macroprudential Policy Toolkit in the Philippines — IMF country report content.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1phlea2022003.pdf_