BSP cautions banks vs taking excessive risks

MANILA, Philippines–The Bangko Sentral ng Pilipinas (BSP) is reminding all firms under its watch of the big stick it wields and can use on lenders and other institutions taking excessive risks that may undermine the stability of the financial sector.

Regulators on Thursday published its new Supervisory Enforcement Policy, a collection of fines and other sanctions the BSP is authorized to use to discipline the country’s financial institutions.

Approved late last March, the new enforcement policy is key to the BSP’s “supervision-by-risk” framework for local banks, which simply states that lenders will be dealt with relative to the risks they take.

“The existence of risk is not necessarily a reason for concern as long as management exhibits the ability to effectively manage that level of risk,” BSP Circular 875 read.

“When risk is not properly managed, the BSP may deploy a wide range of enforcement actions,” it added.

Risk-taking is an integral part of a bank’s business, as interest rates it charges on loans are based on a borrower’s creditworthiness.

The more creditworthy the borrower, the lower the interest rate charged.

To help manage risks, the BSP requires banks to maintain adequate levels of capital and loss buffers to cover potential losses.

A bank that takes excessive risks puts in jeopardy the money entrusted to them by depositors. Hence, the tight regulations.

The BSP outlined its main tools for supervising the banking sector, categorizing them into three areas: corrective actions, sanctions and so-called other supervisory actions that are the most extreme.

Under corrective actions, the BSP said it may order banks to take specific moves that address issues found by examiners.

A bank’s board or directors may also be forced to make a commitment, in writing, to correct certain deficiencies.

Banks that operate beyond the bounds of what is considered safe may be subject to restrictions on the range of businesses they may engage in, forced divestments and monetary fines, among others.

Individual executives may also face penalties, ranging from reprimands and restrictions of benefits, to their forced removal from a bank and a ban from working in the industry.

The most extreme type of enforcement falls under other supervisory actions.

These include placing a bank under a prompt corrective action (PCA) framework, as well as the issuance of cease and desist orders (CDO) on certain activities.

Placing banks under receivership also falls in this category.

According to the BSP, it deemed the issuance of the new enforcement policy necessary to “broadcast to the banking industry the consequences of failure to address the BSP requirements and supervisory expectations.”

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