The First Pillar: Price Stability
The approach to price stability in the Philippines has evolved, reflecting shifts in economic theories, policy approaches, and global best practices. The central bank’s role in maintaining price stability has become more sophisticated, emphasizing inflation targeting, data-driven analysis, and proactive policy adjustments to manage inflation while supporting overall economic growth.
1949-1960s: Basic framework and initial mandate. Upon its establishment, the primary mandate of the Central Bank of the Philippines (CBP) was to promote economic stability, focusing on maintaining external and internal monetary stability.
Basic tools. The Central Bank utilized traditional tools like reserve requirements, discount rates, and selective credit controls to manage liquidity and influence prices.
1970s: Inflation challenges and response. Like many other countries, the Philippines faced inflationary pressures during this period, partly due to the oil crisis and increased global commodity prices.
Policy response. The Central Bank responded with tighter monetary policies, including higher reserve requirements and interest rate adjustments. However, these measures were often constrained by broader economic and political factors.
1980s: Economic crisis and structural adjustment. The 1980s marked a severe debt crisis and economic instability, leading to high inflation rates.
Structural adjustments. In response, the government and international financial institutions implemented structural adjustment programs, including monetary tightening measures to control inflation.
1990s: Shift toward inflation targeting and economic reforms. The 1990s witnessed significant economic reforms, including liberalization and deregulation.
Emergence of inflation targeting. Toward the end of the 1990s, there was a global shift toward inflation targeting as a framework for monetary policy. The Philippines moved in the same direction, although full adoption came later.
2000s: Adoption of inflation-targeting framework. In 2002, the Philippines formally adopted an inflation-targeting approach. This marked a significant shift in the BSP’s policy framework, which focused on achieving and maintaining price stability as its primary objective.
Transparent and forward-looking. The new framework was more transparent and forward-looking, using a range of indicators, including inflation forecasts, to guide monetary policy.
2010s: Enhanced policy tools and challenges. The BSP refined its policy tools, such as through interest rate adjustments, open market operations, and reduction in reserve requirements.
New challenges. New challenges emerged in the aftermath of the global financial crisis, thus requiring careful balancing between growth and inflation objectives.
2020s: Pandemic response and current approach. The pandemic posed unprecedented challenges, leading to economic contraction and volatile prices.
Policy response. The BSP responded with significant monetary easing measures to support the economy while keeping an eye on inflation trends.
Digital transformation and sustainability. The current policymaking approach incorporates digital transformation in financial sector regulation and efforts to promote sustainable finance.
The Second Pillar:Financial Stability
The central bank’s supervisory approach has expanded from focusing solely on individual banks to encompassing the broader financial system. This shift has been driven by various internal and external factors, such as economic crises, global trends, technological advancements, and legislative changes. As a result, the central bank’s role has evolved significantly to ensure the stability and integrity of the Philippine financial system.
1949: Establishment of the Central Bank of the Philippines. The Central Bank of the Philippines (CBP) was established post-independence in 1949, primarily to stabilize the country’s monetary system.
Early role in supervision. Initially, the CBP’s role in banking supervision focused on individual banks, ensuring their solvency, liquidity, and overall financial health.
1950s-1960s: Regulatory framework development: During this period, the CBP developed regulatory frameworks focusing on licensing, reserve requirements, and inspections.
Individual bank focus: The emphasis was still mainly on individual bank performance and regulation compliance.
1970s-1980s: Centralization and control. Under martial law, the government implemented policies that increased the centralization of economic decision-making, and the Central Bank was instrumental in this process. This included control over foreign exchange, regulation of banking activities, and the supervision of credit.
Challenges in supervision. This period was marked by political interference, which affected the efficacy of banking supervision.
1980s-1990s: Liberalization and more reforms. Post-martial law, there was a significant shift toward deregulation and liberalization in the banking sector.
Introduction of new laws. Laws such as the New Central Bank Act (Republic Act No. 7653) in 1993 redefined the role of the CBP (renamed Bangko Sentral ng Pilipinas, BSP, in 1993).
Shift to system-wide supervision: This period marked the beginning of the shift in supervision toward a more holistic, system-wide approach. The BSP also began to focus on the stability and soundness of the banking system rather than just individual entities.
2000s: Adoption of risk-based supervision. The BSP started aligning its regulatory framework with international standards, notably the Basel Accords, which focus on risk-based supervision.
Risk-based supervision. Marking a significant shift from traditional, compliance-focused supervision, the risk-based approach emphasizes assessing the risk profile of banks and tailoring supervisory attention accordingly.
Financial Sector Assessment Program (FSAP). Participation in the FSAP, led by the International Monetary Fund and the World Bank, further enhanced the BSP’s focus on system-wide risks and macroprudential supervision. Compliance with the Basel Core Principles for Effective Banking Supervision is an important aspect of the FSAP.
2010 onwards: Further evolution and challenges. The 2007-2008 global financial crisis led to further refinements in supervision, emphasizing systemic risk, stress testing, and crisis management.
Digital transformation. With the advent of digital banking, the BSP has been adapting its supervisory frameworks to include cyber risk management and financial technology (fintech) innovations.
Sustainable finance and environmental, social, and governance (ESG) principles. Recently, there has been an increasing focus on sustainable finance and incorporating ESG factors into the banking supervision framework.
The Third Pillar:Efficient Payments and Settlements System
The approach to the payments and settlements system in the Philippines has transitioned from traditional, manual processes to a more sophisticated, integrated, and digital framework. Moreover, from being the operator of the PESO Real-Time Gross Settlement, the BSP is now mandated to oversee the National Payment System and exercise supervisory and regulatory powers for the purpose of ensuring the stability and effectiveness of the monetary and financial system.
Pre-1990s: Basic framework. Initially, the payments and settlements system in the Philippines was predominantly manual and paper-based, involving physical cheques and cash transactions.
Central Bank’s role. The Central Bank of the Philippines (now Bangko Sentral ng Pilipinas, BSP) played a central role in overseeing and facilitating these transactions, although the system was relatively rudimentary.
1990s: Introduction of electronic systems. In the 1990s, the Philippines began adopting electronic payment and settlement methods in line with global trends.
Establishment of payment systems: Electronic fund transfer systems were introduced, providing more convenience and efficiency.
2000s: Modernization and integration. The BSP initiated efforts to modernize the payments and settlements infrastructure to enhance efficiency, reduce risks, and comply with international standards.
Real-Time Gross Settlement (RTGS) System: The introduction of the RTGS system was a significant step, allowing for the immediate and final settlement of large-value interbank transfers.
2010: Expansion and diversification. The 2010s saw a diversification in payment services with the introduction of mobile banking, online transactions, and various digital payment platforms.
Strengthening regulatory framework. The BSP strengthened its regulatory framework to ensure the safety, efficiency, and reliability of these emerging digital payment methods.
Late 2010-2020s: Digital transformation and financial inclusion. The BSP launched the National Retail Payment System Framework to establish a safe, efficient, and reliable retail payment system. This enables launch of interoperable electronic fund transfer facilities (EFTs) such as PESONet and InstaPay. It also enabled the establishment of QR Ph which is the national QR code standard for zayments.
PESONet and InstaPay. Key developments under the NRPS included PESONet for batch electronic fund transfers and InstaPay for real-time low-value fund transfers.
Focus on financial inclusion. These developments aim to enhance financial inclusion by modernizing and making digital payments accessible to a broader segment of the population, since digital payments serve as a gateway to financial inclusion.
Response to COVID-19 pandemic. The pandemic accelerated the shift toward adoption of digital payments, significantly increasing electronic payment transactions due to mobility restrictions and health protocols.
Central bank digital currency (CBDC) exploration. The Project Agila, BSP’s wholesale CBDC project is one of the major capacity building initiatives to ensure that the BSP is abreast of the fast-evolving technologies that drive emergence of alternative payment instruments.
Cross-border payments. The BSP seeks to modernize cross-border payments to make the country more competitive amid increasing globalization of trades and investments as well as growing tourism and manpower mobility. The BSP pursues both bilateral and multilateral approach with focus on linking our fast payment system, InstaPay, with those of other countries in the ASEAN region.
Sustainability and cybersecurity. Current and future efforts will include enhancing the sustainability of payment systems and strengthening cybersecurity measures to protect against digital fraud and cyber threats.
Designation of payment systems. Upon its determination that a payment system poses or has the potential to pose systemic risk, or is necessary to protect public interest, the BSP designates such payment system. To date, there are five payment systems designated by the BSP and they are: Philippine Peso Real-Time Gross Settlement Payment System, Philippine Domestic Dollar Transfer System, PhP-USD Payment vs Payment System, Philippine Electronic Fund Transfer System and Operations Network (PESONet), and InstaPay or Real-Time Low Value Electronic Fund Transfer System. Pursuant to Republic Act No. 11127 or the National Payment Systems Act (NPSA), the BSP is not only empowered to own and operate payment systems; it also now has the authority to oversee the payment systems in the Philippines and exercise supervisory and regulatory powers for the purpose of ensuring the stability and effectiveness of the monetary and financial system. BSP Circular No. 1049 on Registration of Operators of Payment Systems and BSP Circular No. 1089 on Payment System Oversight Framework are two of the implementing rules and regulations issued by the BSP under the NPSA.
References: BSP website, The Story of Philippine Central Banking (2019)