According to the BSP, banks are now feeling the pressure to seek out more income opportunities as key interest rates have been reduced to new record lows.
But the BSP said existing rules would be enough to make sure that banks would not overly expose themselves to various types of risks, such as higher loan defaults brought on by a potential relaxation of credit standards, as well as losses arising from higher investments in non-traditional portfolio instruments.
“We have macroprudential rules in place. For instance, banks cannot engage in excessive extension of real-estate loans because there is a limit. Moreover, banks cannot overly expose themselves to just one big corporate borrower because there is also a limit on that,” BSP Deputy Governor Diwa Guinigundo said.
Under current rules, banks are supposed to keep their outstanding loans to real estate developers to just 20 percent of their total loan portfolio. Moreover, loans extended to a single borrower must not exceed 20 percent of a bank’s net worth.
The BSP also said banks are required to observe “know-your-customer” guidelines to help ensure loans are extended to creditworthy borrowers.
For risks related to securities investments, Guinigundo said, there are capital requirements so that banks can adequately cover any losses arising from these ventures.
Also, banks are mandated to have risk-management systems that can determine the amount of risk exposure they have at any given time, and thus the amount of capital they must have, he said.
“[The BSP] is aware that the low-interest rate environment could drive banks to undertake riskier activities if only to preserve their level of profitability. However, there are good safeguards in place against reckless investment behaviors on the part of the banks,” Guinigundo explained.
Last Thursday, the BSP cut its key policy rates by another 25 basis points. This was the fourth time this year that the monetary authority slashed the rates, which influence commercial interest rates.
The move is intended to make borrowing costs cheaper. This, in turn, will allow people and businesses to borrow more, encouraging them to step up their spending and investment activities.
According to the regulator, the rate cuts are meant to increase domestic spending, and help spur growth of the economy, in the wake of falling export revenues due to the crisis in key markets abroad.
The BSP’s key policy rates now stand at historic lows of 3.5 and 5.5 percent for overnight borrowing and lending, respectively.
Banking industry players said low interest rates would prompt banks to seek out additional income opportunities to compensate for lower yields.
Nonetheless, industry players also said banks would not likely engage in excessively risky investment activities.
They said that banks are well aware of the adverse effects of excessive risk-taking, with the lessons of the Asian financial crisis of the late 1990s still fresh in their minds.