Preparations for systemic risks

After years of informal existence, the Financial Stability Coordination Council (FSCC) was formally organized with the recent signing by President Duterte of Executive Order No. 144.

The FSCC is an interagency council composed of the Bangko Sentral ng Pilipinas (BSP), the Department of Finance, the Securities and Exchange Commission, the Insurance Commission and the Philippine Deposit Insurance Corp.

Its objective is to “enhance the stability of the financial system in mitigating systemic risks through timely macroprudential policy interventions.” Towards this end, the FSCC is authorized to, among others, issue directives or policy regulations to achieve financial stability.

Systemic risk may be defined as “the possibility that an event at the company level could trigger severe instability or collapse in an entire industry or economy.”

Thus, the FSCC is tasked to monitor the country’s financial landscape to make sure its principal players, e.g., banks, investment companies and other financial institutions, do not engage in activities that may lead to systemic risks and, where necessary, take appropriate preemptive or remedial action to prevent them from happening or mitigate their effects.

The germ of the idea to create the FSCC may be traced to the 2008 housing bubble in the United States that resulted in the collapse or restructuring of several iconic investment banks.

The US government had to lend or invest billions of dollars in those companies to prevent its economy from going into a deep recession that, on account of its prominent global standing, could adversely affect the world economy.

That financial rescue was justified by the US government on the ground that they were “too big to fail.” Meaning, their operations were so acutely ingrained in the US financial system that their failure or collapse would be disastrous to the economy.

The Philippines’ economic managers at that time were aware that a similar financial problem, although for a different cause, could happen here.

Note that the country has several business conglomerates that own or control companies engaged in activities that are, directly or indirectly, linked to the national economy, such as banking, investment, insurance, real estate development and public utility operations.

Thus, for example, if a conglomerate with controlling or substantial interests in those companies goes bankrupt for one reason or another, that event could result in, among others, a bank run, loan defaults and massive loss of employment.

And if the financial breakdown “infects” other businesses that depend on the conglomerate for their viability, the impact of the contagion would invariably be felt by the national economy.

Sometime in 2011, I had the opportunity to participate in a simulation exercise with the regulatory offices that now compose the FSCC on what steps should be taken in case a business conglomerate encounters serious financial trouble.

Under the able leadership of then Deputy BSP Gov. Nestor Espenilla Jr., the participants “mapped” that imaginary conglomerate by listing the companies under its umbrella and reviewed their respective financial statements, including the consolidated financial statement, to determine whether or not their debt ratios and other obligations are manageable.

Working on the assumption the conglomerate is beyond salvation, the regulators discussed how each of them, based on their respective powers and responsibilities, can soften the economic and social fallout from the conglomerate’s collapse.

Arriving at a consensus on the action plan, however, was not a walk in the park. The regulators were very protective of their turfs and objected to suggestions that appeared to diminish or dilute their charter.

That was then. With the FSCC formally organized and the lines of authority clearly defined, a repeat of that situation may be far-fetched.

Considering the heavy responsibility given to the FSCC, its mantra may be: “Hope for the best but prepare for the worst.” INQ

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