BSP expects local banks to weather market volatility

The country’s banking sector is expected to remain stable throughout the capital market volatility resulting from the tapering of the stimulus program in the United States.

According to the Bangko Sentral ng Pilipinas, banks, in compliance with local regulatory requirements, have been conducting regular stress tests to monitor the appropriateness of their capital, especially during uncertainties.

A stress test determines the sufficiency of capital while assuming worst-case scenarios such as a default by borrowers, withdrawal of investments and an increase in interest rates. Depending on the results of the stress tests, banks adjust their capital accordingly such as through the issuances securities.

“The BSP has emphasized the need for banks to enhance their risk-management practices. The BSP’s approach to supervision is preparing them for things like [market] volatility, which is inevitable,” BSP Deputy Governor Nestor Espenilla Jr. said in an interview.

Besides the stress test conducted by banks on their own resiliency, the BSP likewise regularly conducts separate stress tests on its supervised institutions.

Espenilla said the decision of the BSP to fully implement Basel 3 also helped prepared banks for external shocks such as the one resulting from the monetary tapering in the United States. Basel 3 is an updated set of regulatory requirements focusing on the capital of banks. Most advanced economies are delaying the implementation of Basel 3 up to 2018, but the Philippines is one of the few countries that has fully implemented it.

The tapering in the United States had caused a flight of portfolio capital away from emerging markets like the Philippines. Amid views of a slowdown in global liquidity, there was speculation that demand for emerging-market assets would decline as the tapering continued. Such speculation prompted some investors to dump emerging-market assets.

Given this scenario, the BSP admitted that the scope for keeping interest rates at historic lows has narrowed. With the likely increase in interest rates, profit margins of banks from money market activities are seen to decline. The BSP, howerver, said the Philippine banking sector was expected to remain relatively stable.

It expects banks to continue posting profits and keep capital adequacy ratios well above the regulatory requirement of 10 percent. The latest average capital adequacy ratio of local banks stood at 18.6 percent. Michelle V. Remo