Banking system can withstand mass movement of retail deposits, says BSP | Inquirer Business

Banking system can withstand mass movement of retail deposits, says BSP

By: - Business News Editor / @daxinq
/ 03:16 PM June 06, 2018

The central bank’s drive to promote financial inclusion by encouraging banks to accept small deposits from retail clients will not necessarily result in financial instability, a recent study found.

In a statement, the Bangko Sentral ng Pilipinas said the pursuit of financial inclusion is not likely to add to financial instability, according to a paper co-written by Dante Canlas, Eli Remolona, and Johnny Noe Ravalo.

Entitled “Do small bank deposits run more than large ones? Three event studies of contagion and financial inclusion,” the study was published by the Bank of International Settlements (BIS).

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Using a technique referred to as difference-in-difference regression, the authors find that there is no clear difference between the behavior of small depositors and that of large depositors.

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The paper looks at deposits of different account sizes and examines whether those with the smallest balances – typically associated with financial inclusion – behave differently from those with the biggest balances.

The paper also documents the tendency of depositors to withdraw funds in anticipation of possible forthcoming bank difficulties. The authors noted that this behavior was evident both for depositors with the largest and smallest bank balances.

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This suggests that pursuing financial inclusion through the creation of new but small deposits is not likely going to add to financial instability.

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“This is further supported by the finding that we did not observe any significant withdrawals at nearby banks when a large bank is closed,” Ravalo said.

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BSP Governor Nestor Espenilla Jr. welcomed the findings, pointing out that “the completion of the paper and its publication through the BIS working paper series is a testament to our renewed commitment to strengthen and expand the research program of the BSP.”

Canlas was formerly the Director General of the National Economic and Development Authority (NEDA) and professor at the UP School of Economics. Remolona is the BIS Chief Representative for Asia and the Pacific, while Ravalo is the Assistant Governor and Head of the Office of Systemic Risk Management of the BSP. /ee

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TAGS: Bangko Sentral ng Pilipinas, Bank of International Settlements (BIS), Banking

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