BSP readies new stress test for banks

Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla Jr. said they are preparing a new stress test for banks as part of its pre-emptive monitoring to prevent systemic collapse.

The proposed details for the debtto-earnings borrowers test (DEBT) – which is a macroprudential measure – has been disseminated to the banking community for comments. The BSP considers this stress test as its latest response to any “potential build-up of systemic vulnerabilities.”

The DEBT “is akin to the existing real estate stress test,” Espenilla told bankers in an event.

Besides the DEBT, the BSP has released exposure drafts to the countercyclical capital buffer and the borrower’s interconnectedness index.

The BSP is enhancing its various surveillance tools, including possible adoption of big data analytics to im- prove monitoring.

Espenilla has previously assured that the banking community will always be consulted if there are any proposed changes to how they monitor bank capital and liquidity, as well as market risks.

Since 2011, the central bank has adopted stress test parameters for credit risk and market risk, as well as liquidity and interest rates’ risk. The stress tests determine how far local banks can absorb certain levels of stress and to examine the banking sector’s weaknesses and capability to deal with these shocks.

To better scrutinize foreign exchange (FX) risks, Espenilla also said that they are drafting a governance framework for the FX markets for the US-peso market and for third currencypeso exchange transactions.

He stressed that a flexible exchange rate is crucial in monetary stability and for the external sector balance. “We do not target an exchange rate level but we carefully watch out for excessive volatility that can disrupt the economy. Our ideal is a market-determined exchange rate that offers no persistent one-way bets to anyone,” said Espenilla.

As for the governance framework for the FX markets, he said that this will “improve transparency, price discovery, and market conduct.”

“We are currently drafting the governance framework for FX markets with a set of general principles that shall apply not only to the existing US dollar/peso market, but also to any third currency/peso market that may be established in the future. We have initiated engagement with the industry so that existing trading markets can conform to the new framework within a mutually agreed timeframe,” said Espenilla during the general assembly of the Money Market Association of the Philippines.