Bangko Sentral ng Pilipinas Governor Felipe Medalla said Monday the strong domestic banking system can withstand the possible shocks from the collapse of two lenders in the United States.
Medalla sent notes to President Ferdinand Marcos Jr. to assure the stability of the Philippine banking system amid the collapse of Silicon Valley Bank and Signature Bank in the US and underscored the strength of the domestic asset base that significantly differs from that of the US.
Medalla said local banks mostly hold loans which are less susceptible to changes in fair value, while security holdings of the California-based Silicon Valley Bank were larger in relation to their capital.
“[Local banks] have lower market risk exposure compared to US banks. Losses of Philippine banks, including estimated net unrealized losses on security holdings due to the rising interest rate environment, are expected to be smaller [as a percentage of assets] relative to their US counterparts,” Medalla said.
Medalla said the US Federal Reserve’s policy rates rate hikes were larger and came from a lower level than the BSP policy rates. He said the Philippines’ yield curve did not invert similar to the US yield curve.
Medalla also noted that US banks’ bond holdings have longer tenors of up to 30 years, while Philippine banks mostly hold government securities with residual maturity of up to 15 years.
He said local banks maintain a diversified lending base across counterparties and industry types, and their loan quality is manageable. They also have strong risk governance and risk management systems and maintain sufficient capital to absorb unexpected losses from policy rate increases.
“[Local banks] are highly liquid and tend to rely on a wide depositor base compared to US banks,” Medalla said, adding that domestic lenders do not have material exposure to the failed banks in the US.
“Nonetheless, the BSP will continue to closely monitor developments, assess their impact on the banking system and respond accordingly,” Medalla said.
Medalla said the BSP implemented structural reforms to ensure the safety and soundness of banks. These include adoption of sound governance and risk management standards which enable banks to assume risks commensurate with their risk-bearing capacity; prudential limits and requirements, including the Basel III reforms on capital and liquidity standards which enable banks to maintain adequate capital and liquidity; and strengthened surveillance mechanisms and coordination efforts which allow the BSP to closely monitor developments that may pose risks to the financial system and proactively respond as warranted.
The BSP also has in place emergency loan facilities which could be tapped by solvent banks experiencing serious liquidity problems. The BSP was also given enhanced resolution authority through the amendments to the Charter of the Philippine Deposit Insurance Corp.
Finance Secretary Benjamin Diokno, the head of the economic team, earlier assured that the economy and the local banks remained strong and would not be affected by the recent financial turmoil in the United States.
The 44-member strong Bankers Association of the Philippines also assured the public that developments in the US financial system have no substantial or material impact on Philippine banks.
Citing the latest available data, Medalla said as that of end-January 2023, total loan portfolio, net of allowance for credit losses, comprised the largest share of the banking system’s total assets at 53 percent, followed by investments and cash and due from banks with 29.2-percent share and 12.2-percent share, respectively.
The banking system’s non-performing loans ratio stood at 3.3 percent as of end-January 2023, down from 4.1 percent a year ago.
Reports on Monday also said the UBS Group agreed to buy ailing competitor Credit Suisse for $3.25 billion as part of an “emergency ordinance” to prevent financial market instability. Commenting on the said development, Medalla said that meant Credit Suisse is too big to fail.
“It does not look like that other globally systemically important banks [GSIBs] have the same problem, in which case the impact on the global economy [and therefore the Philippines] will not be significant,” Medalla said. Julito G. Rada