IMF calls for bank capital buildup in PH

The International Monetary Fund (IMF) said the Bangko Sentral ng Pilipinas (BSP) might want to consider slowly increasing banks’ capital requirements while interest rates are going down to prevent a dangerous buildup of risks from excessive lending activities.

In a country report, the IMF said the BSP should be ready to adjust macroprudential policy so it could react to developments in the current financial cycle and preempt the formation of systemic vulnerabilities.

“As monetary policy eases, and the pick-up in investments materializes, credit demand may increase, requiring vigilance,” the Washington-based institution said.

”Gradual phase-in of higher capital requirements during the expansion phase of the financial cycle could mitigate excessive credit growth and strengthen banks’ capacity to absorb losses in the event of financial stress,” it added.

READ: IMF: Time for BSP to use rate tweaks vs supply shocks

The IMF made the recommendation following its 2024 Article IV consultation in the Philippines, which wrapped up early this month.

Recall that the visiting IMF team had flagged potential “pockets of vulnerabilities” in the banking system that the BSP must closely monitor to protect financial stability, particularly risks from still-high vacancy rates in the local property sector and fast-rising growth in consumer credit.

The IMF said “continued vigilance is warranted” against possible systemic risks coming from the real estate sector. This, after the local property market saw a “big shift” following the exodus of online casinos and the pandemic-induced pivot to work-from-home arrangements that had emptied many office spaces.

Real estate exposure

Latest BSP data showed that residential real estate loans that are deemed nonperforming—or 90 days late on a payment and at risk of default—had amounted to P72.74 billion in the third quarter, cornering 6.82 percent of total home lending portfolio. The ratio was still higher than the prepandemic level of 3.1 percent.

The IMF said it would be better for the BSP to replace the current 20-percent cap on the real estate exposure of banks with a “sectoral systemic risk buffer” to provide lenders with “price-based incentives to align their loan portfolios and capital buffers with systemic risk.”

On the rapidly growing consumer lending sector, the IMF had said the BSP must ensure that banks are increasing their exposure to households with tested credit profiles to avoid losses from unpaid loans.

As inflation remains benign, the BSP this month delivered a third quarter-point cut to the policy rate, unwinding the previous tightening actions that were one of the most aggressive in Asia.

That brought down the key rate to 5.75 percent, with Governor Eli Remolona Jr. hinting at a continuation of a “measured” easing cycle next year. This, in turn, is expected to spur bank lending on households, which have been growing at over 20 percent in recent months.