“The BSP has also advocated for financial reforms to enhance inclusivity, such as the creation of branch-lite banking units in 2017. This move has effectively brought banking services to underserved areas, making it easier for more people to participate in financial activities.”
The Bangko Sentral ng Pilipinas marks its 30th year with a banking system that is sound, stable and liquid.
By the end of 2022, the Philippine banking system’s assets stood at P23,047.7 billion, up by 10.7 percent year-on-year. Over the same period, gross total loan portfolio grew by 10.8 percent to P12,625.1 billion. The Philippine banking system also remained well capitalized and managed to keep its exposure to bad debts low. As of end-2022, capital adequacy ratio on solo and consolidated bases stood at 15.7 percent and 16.3 percent, higher than the 10-percent minimum requirement of the BSP and the 8.0 percent prescribed by the Bank for International Settlements. The non-performing loans ratio settled at 3.2 percent in December 2022 compared with 4.0 percent in the same period of the previous year.
Since its creation in 1993, the Bangko Sentral ng Pilipinas (BSP) has upheld its mandate of maintaining financial stability in the country.
Such is demonstrated by banks and other financial institutions that can effectively meet the service requirements—such as savings, payments, fund transfers, and investments—of individuals, businesses, government institutions, and other stakeholders.
Financial stability is also exhibited when risks that affect the entire financial system, rather than just an individual bank or entity are properly managed. An example would be an economic shock that causes a rise in loan defaults.
Learning from the challenges of the past and adapting to the complexity of the present
In response to the 1997 Asian financial crisis, the BSP changed its approach to banking supervision. Instead of simply ensuring compliance, the BSP focused on the ability of banks to measure and manage risks. This new approach allowed financial institutions to take more informed risks, such as introducing products and services or expanding to new markets as long as they can assess and handle the potential impact of these offerings on their financial standing. In addition, the central bank introduced the “consolidated supervision framework” in 1998. Under this framework, the BSP not only focused on the performance of individual banks but also on complex banking groups and on the effect of a bank’s dealings with the conglomerate to which it belongs.
In 2001, the BSP also adopted the “risk-based capital adequacy framework” in supervising banks. This required banks to set aside capital commensurate with their credit risks (i.e., risks of loan default by their borrowers). Banks were given guidelines on how to calculate “risk-based” capital that they ought to set aside. This supervisory approach is aligned with international best practices, particularly the “Core Principles for Effective Banking Supervision” issued by the Bank for International Settlements.
In 2006, the Philippines adopted the Basel II framework and provided guidelines for the use of derivatives in 2008. This framework encouraged banks to boost their risk management practices and strengthen their capital bases, which prepared them for the Global Financial Crisis of 2008.
Enhancing risk management
In 2013, relative to the Basel III framework, the BSP introduced guidelines for a risk-based capital adequacy framework that included maintaining specific ratios and a capital conservation buffer. These measures are meant to foster responsible financial management, consistent with the overall goal of safeguarding financial stability.
Further, Republic Act No. 10641, or An Act Allowing the Full Entry of Foreign Banks in the Philippines, helped foreign banks enter the market, resulting in a more competitive banking environment.
To ensure banks are well-equipped to handle potential risks, the BSP mandated universal and commercial banks in 2019 to establish their internal capital adequacy assessment processes.
Embracing innovation, sustainability, and inclusion
Recognizing the potential of technology, the BSP partnered with RegTech for Regulators Accelerator (R2A) in 2017 to promote efficiency and gain more insightful information on financial supervision. The R2A is a pioneer project that provides technical assistance for financial sector regulators in developing and testing the next generation of digital supervision tools and techniques. Under this partnership, the BSP piloted two RegTech solutions: an application programming interface for supervisory reporting and the BSP Online Buddy, or BOB, a chatbot program found on the BSP website for complaints handling. At reduced costs, the R2A has helped the BSP gather information from banks promptly and detect patterns of behavior that negatively affect consumers.
The BSP has also advocated for financial reforms to enhance inclusivity, such as the creation of branch-lite banking units in 2017. This move has effectively brought banking services to underserved areas, making it easier for more people to participate in financial activities.
Digital platforms—supported by a regulatory environment that ensures responsible innovation and cyber resilience—play an important role in making financial products and services more accessible to underserved markets. Toward this end, the BSP has developed a framework for digital banks that serve their customers via online channels with no physical branches.
To date, there are six digital banks operating in the country.
Governance, stability, and consumer protection
The BSP highly values corporate governance and transparent reporting and promotes the same among financial institutions. The BSP issued Circular No. 456 in 2004, which promotes fairness, accountability, and transparency in the financial sector. The circular requires its supervised institutions to form audit, corporate governance, and risk management committees with clearly defined charters and reporting relationships. These committees are tasked to ensure oversight and evaluation of financial reporting, internal controls, risk management, corporate governance principles, and the effectiveness of the board itself.
One of the BSP’s key objectives is managing systemic risks. This involves collaborating with financial authorities and utilizing macroprudential policy strategies to address interconnected risk behaviors.
In addition, the BSP places significant emphasis on consumer protection, considering it an integral component of corporate governance, culture, and risk management. To ensure effective supervisory oversight, the BSP adheres to global standards and constantly engages with stakeholders to implement reforms.
The BSP actively participated in the development and implementation of the Financial Products and Services Consumer Protection Act. In compliance with the law, the central bank issued the corresponding rules and guidelines, established a dedicated consumer protection department, and conducted consumer education campaigns for financial consumers.
The BSP also implemented regulations to enhance cybersecurity in the country’s financial system. Through its issuances, the BSP required financial institutions to establish robust information security management systems, manage technology risks, and implement cybersecurity risk management frameworks. These measures aim to protect both financial institutions and consumers from cyber threats, ensuring the integrity and security of the financial system.
Relief measures during the global health crisis
The BSP provided temporary regulatory and rediscounting relief measures to its supervised institutions to ease the impact of the COVID-19 pandemic.
Some of the key measures include the extension of financial relief to borrowers, which allowed banks to stagger the booking of credit losses for individuals and businesses as well as capital relief for provisioning requirements. The BSP also set an interest-rate ceiling for credit card transactions to ease the financial burden on consumers and small businesses. Incentives for lending were also introduced, such as reducing credit risk weights for loans to micro, small, and medium enterprises (MSMEs) and assigning a zero-percent risk weight to loans guaranteed by the Agricultural Guarantee Fund Pool and Agricultural Credit Policy Council.
The BSP also allowed the utilization of loans to MSMEs as an alternative form of compliance with reserve requirements. Other relief measures included the utilization of capital and liquidity buffers, increase in the Single Borrower’s Limit (SBL), relief from sanctions for breaches of the SBL by foreign bank branches, increase in the real estate loan limit, and relaxation of the guidelines on Real Estate Stress Test limits. The BSP also promoted continued access to financial services by waiving transaction fees, providing temporary regulatory relief for banks offering Basic Deposit Accounts, and supporting the delivery of financial services through operational relief measures.
Over the past 30 years, the BSP’s efforts have contributed to a robust and resilient financial system in the Philippines. The central bank has played a vital role in fostering a conducive environment for sustainable economic growth and financial well-being by prioritizing financial stability, risk management, financial inclusion, innovation, and consumer protection for the benefit of all Filipinos.