S&P urges more banking reforms

The government has to push for further reforms to strengthen the regulatory framework and promote transparency in the banking sector to ensure the financial system—one of the few legs the economy stands on—would stay strong.

Credit watchdog Standard & Poor’s (S&P) classified in a recent report the Philippine banking system’s level of risk to be the same as that of Indonesia, Portugal, Iceland and Ireland. Iceland, Indonesia and Portugal have lower sovereign ratings than the Philippines, while Ireland is several notches above.

The banking system’s risk profile showed the sector underperformed in several areas relative to international peers.

“Our assessment of economic risk in the Philippines reflects the country’s low income level and infrastructure bottlenecks that constrain growth prospects,” S&P said. “Relaxed underwriting standards and a developing institutional and governance framework heighten credit risk.”

S&P said the Philippine banking sector was put in “group 7” of the firm’s Banking Industry Country Risk Assessment (BICRA) criteria. The group includes countries with junk sovereign ratings and others such as the Philippines, which are considered “investment grade.”

In a statement, S&P said economic imbalances such as in the property market could be contained. While the credit quality of banks operating in the Philippines was improving, S&P said poor transparency, weak corporate governance and inefficient legal infrastructure might limit any material reduction in credit risk.

Credit risk in the system may also increase if acceleration in property prices or credit growth is prolonged. While regulatory standards in the Philippines were broadly in line with international standards and in some instances more stringent, S&P warned that legal hindrances could still render regulators impotent.

Inadequate legislation and legal protection for the Bangko Sentral ng Pilipinas’ (BSP) supervisory staff weakened the regulator’s ability to implement prudent measures. “The government’s attempts to amend the legislation have so far been protracted,” S&P said. It was referring to the proposal in Congress to offer more protection to BSP bank supervisors—part of a series of reforms under a bill seeking to amend the central bank’s charter.

Under current rules, BSP examiners are required to practice “extraordinary diligence” in their jobs, a hazy yet strict criteria with which few other government employees have to comply. This criteria opens up bank examiners to frivolous lawsuits, which may hinder their abilities to supervise erring industry players.