Pursuing forward-looking financial sector reforms
n the last 25 years, the Bangko Sentral ng Pilipinas (BSP) has successfully traversed the rapidly evolving and increasingly sophisticated global financial landscape by pursuing broad-based and strategic financial sector reforms to safeguard the resilience of the domestic financial system against external headwinds. With its proactive response to challenges, the BSP made significant strides in instituting reforms to preserve the continued stability of the financial system and sustain the growth of the economy. Laying the Groundwork
In the 1990s, the BSP strengthened the banking sector through liberalization. In 1994, foreign banks were allowed to operate in the Philippines with the passage of Republic Act No. 7721 (An Act Liberalizing the Entry and Scope of Operations of Foreign Banks in the Philippines and for Other Purposes.The BSP raised the minimum capitalization of domestic banks to enable them to compete with foreign players.
In the aftermath of the 1997 Asian Financial Crisis, the BSP introduced a comprehensive set of strategic reforms to enhance financial system stability, promote institutional safety and soundness, and protect the public. During this time, the BSP focused on strengthening the legal framework on banking and upgrading banking practices, in tandem with enhancements insupervision and examination approaches, and in line with internationally accepted standards.
The enactment of the General Banking Law (GBL) in 2000 served to institutionalize banking reform in the Philippines, laying down the basis for all BSP regulatory reforms, such as the following initiatives: formal adoption of a risk-based capital requirement along the recommendation of the Basel Committee; liberalization of foreign bank ownership in existing local banks up to 100% during a seven-year window of opportunity; implementation of fit and proper rule for individuals elected or appointed as bank directors or officers; strengthening of safeguards against connected lending; and promotion of greater transparency and disclosure standards for banks.
With the enactment of the Anti-Money Laundering Act in 2001, banks were required, as a policy, to strictly observe due diligence in their Know-Your-Customer (KYC) program. Banks were also required to report suspicious transactions relating to potential or actual financing of terrorism to the Anti-Money Laundering Council (AMLC).
In the ensuing years, the BSP continued to embark on strategic reforms in the banking system. Key reform initiatives include shifting to risk-based capitalization, promoting a consolidated approach to bank supervision, raising the bar on corporate governance standards, establishing a safe and efficient payments system, and accelerating greater financial inclusion. Financial Stability, Inclusive Growth
Moving forward, the BSP remains committed to pursue progressive and meaningful reforms as it continues to navigate the path toward achieving greater financial stability and fostering broad-based and inclusive growth.
Building on the gains of its earlier reform initiatives, the BSP is setting its sights on continuously providing an enabling regulatory environment for a dynamic, resilient and inclusive financial system under the strategic direction of “Continuity Plus Plus”. Strengthening Risk Management, Corporate Governance
In the midst of market volatilities, the BSP sought to promote a strong risk managementsystem to effectively address potential sources of vulnerability.The BSP implemented the capital requirements under Basel 3 to further strengthen the quality of banks’ capital that will serve as buffer against potential losses. The pace and sequencing of the reforms have taken into account local market conditions. This complements the reforms on the minimum capital requirement of banks. Further, the BSP adopted the Basel III Leverage Ratio Framework to constrain the potential buildup of leverage in the banking system and to avoid the deleveraging process which can destabilize the broader financial system and the economy.
The BSP has also adopted a more calibrated approach to monitor bank liquidity positions. The liquidity requirements were aimed at ensuring that BSFIs function smoothly not only during normal times but also during stressed conditions.The BSP will continue to enhance surveillance mechanisms to improve the monitoring of bank liquidity positions and promote greater transparency and accountability. Specific reforms in this area include the issuance of comprehensive liquidity risk management guidelines and the implementation of minimum liquidity ratios (Liquidity Coverage Ratio, Minimum Liquidity Ratio, and Net Stable Funding Ratio) for banks and their selected subsidiaries.
The BSP has also institutionalized the collection of data on cross-border financial positions of banks on a periodic basis. This enables the timely and comprehensive assessment of potential financial risks and transmission channels emanating from foreign counterparts of Philippine banks.
In order to foster a deeper culture of good governance and risk management practices across functional supervisory areas, the BSP strengthened the role, accountability, and responsibility of the board of directors in strengthening the foundation for good governance, particularly, the board’s ability to exercise objective judgment and establish a strong system for checks and balances within the bank or financial institution. Enhancements on risk management guidelines in the pipeline include intraday liquidity management and liquidity risk management. These shall be complemented by other facets of Basel III reforms on risk management particularly on counterparty risks, and market risk and trading books.
Primarily, the BSP’s corporate governance reform agenda constitute establishing fit and proper requirements for the appointment of board of directors and senior officers; raising the standards for internal control and compliance; promoting fairness, accountability and transparency in financial reporting; and strengthening the management of specific risk areas such as credit, market, liquidity, information technology, and operational risks. The BSP also instituted the Supervision by Risk framework to strengthen its supervisory review process for these key risk areas.
The BSP’s recent regulatory issuance (Circular No. 969 dated 22 August 2017) sets out enhanced requirements on the membership composition of the board. This is to ensure that the board is comprised of a collective mix of individuals who possess the expertise and competence to effectively manage the financial institution. The revised guidelines also aim to promote an environment that fosters exchange of views and exercise of objective judgment through the appointment of independent directors, as well as the strengthening of independent units of risk management, internal audit, and compliance within the organization.
Part of the BSP’s objective to maintain financial stability is to uphold the integrity of the financial system by promoting greater disclosure and transparency in financial reporting. Banks are expected to establish an effective reporting system that enables the generation and timely submission of reports that are in accordance with the BSP’s reporting standards (i.e., prudential reports should be complete, accurate, consistent reliable and timely). The BSP also implemented reforms to strengthen the country’s anti-money laundering (AML) regime. BSP regulatory issuances on AML highlight the adoption of a proportionate, risk-based approach in managing AMLrelated risks. Fully Liberalizing Financial Services
The rapid evolution of digital technology, particularly of smart phones at the turn of the new millennium, revolutionized the way banking and financial products are delivered around the world. This supplements the ongoing reforms of the BSP to liberalize the provision and delivery of banking services to promote healthy competition and wider financial access particularly to those unbanked and underbanked areas of the country.
Following the enactment of the liberalization of foreign bank entry under Republic Act No. 10641, the BSP also liberalized its branching rules with the establishment of “lite branches” (microbanking offices and other banking offices aimed at promoting greater financial inclusion), and lifting of moratorium on bank branching to expand client reach and revolutionize the delivery of banking services nationwide.
Recognizing the upside of electronic banking in terms of expanding client reach and in improving financial access, the BSP also allowed banks to engage in electronic banking as early as year 2000.
In 2017, the BSP implemented the cash agent model to provide an innovative service delivery channel through the combination of e-banking’s self-service online, and real-time transaction together with cash-in, cash-out facility provided by the third party cash agent.
Parallel to this, the BSP is further opening up the economy through a more liberal foreign exchange policy environment with ongoing reforms designed to promote greater ease in the use of the foreign exchange resources for the legitimate needs of the banking system.
The BSP’s core strategy remains that of being proactive and responsive to evolving market trends, whether it is in the area of increasing efficiency in the delivery of financial services, employing macro-surveillance tools, or reforming the capital market. Going forward, the BSP will continue to strive to be both resolute and flexible in itsmovesas it continuously pursuesmeaningful financial sector reforms to safeguard overall resilience of the financial system.