BSP expands toolkit for bank surveillance

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is further expanding its toolkit to identify emerging risks and vulnerabilities of the country’s banking system.

BSP Deputy Governor Chuchi Fonacier said the regulator is set to roll out the Banking Sector Resilience Index as well as the Vulnerability Index for Cross Border Risks next year.

“These are both part of our surveillance tools that will serve as indicators to emerging risks and vulnerabilities of the banking system,” she said.

Fonacier said the BSP has started the construction of the Vulnerability Index for Cross Border Risks and is set to start the construction of the Banking Sector Resilience Index also within the year.

“We should be able to work on the other risks this year,” Fonacier said.

The Banking Sector Resilience Index will serve as a comprehensive measure of banking sector resilience over time, while the Composite Vulnarebility Index of Banks will serve as a comprehensive assessment of sources of vulnerabilities of different banking groups over time.

The regulator intends to use high-frequency and market-based metrics to assess banking sector resilience.

In the latest BSP woking paper series titled “Have domestic prudential policies been effective: Insight from bank-level property loan data,” authors Veronica Bayangos and Jeremy de Jesus said the market based indicators are quantitative tools that could be used to gauge the market’s assessment of the resilience of the Philippine banking system.

“These indicators are based on information from the financial markets and are thus, timely, reflect expectations of future performance of the banking system and will offer good comparability across countries and through time,” the paper said. 

The study examined the effectiveness of domestic prudential policies in restraining growth of real bank loan commitments and in preserving the quality of bank loans in the Philippines using panel bank data regression from the first quarter of 2014 to the fourth quarter of 2017. 

The study introduced three novel sets of database, including measures of tightening and loosening of domestic prudential policies in the Philippines, by instrument such as credit-related instruments, liquidity-related instruments, capital-related, interconnectedness instruments, changes in banks’ reserve requirements against domestic deposits and deposit substitutes, and currency-related instruments; database documents changes in monetary policy actions using data on the BSP’s overnight policy rate and its monetary operations rates under the Interest Rate Corridor system; and the database compiles and records the volume of loans granted by banks for new purchases of residential properties as well as the average acquisition cost of the property from the Real Property Price Index Report.

The paper said tightening of domestic prudential policies, particularly those tightening measures meant to preserve resilience of the banking system are effective in curbing growth of real bank loan commitments to borrowers for acquiring new residential properties. 

The study also highlighted the bigger negative impact of tightening prudential measures on real bank loan commitments by universal and commercial banks compared to thrift banks. 

Furthermore, it showed the share of bank deposits to total liabilities, liquidity position and capital adequacy gap are important drivers of growth in real bank loan commitments to borrowers.

Likewise, restricting both instruments meant to promote resilience of banking system and to address cyclical movements limits weakening of bank loan quality, with the latter type of instruments having bigger negative impact.