IMF Executive Board Concludes Financial System Stability Assessment with Philippines

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Financial System Stability Assessment [1] with the Philippines on March 5, 2021.

The work of the Financial Sector Assessment Program (FSAP) was conducted during the COVID-19 outbreak, with the virtual missions concluding on October 20, 2020, and adapted to include the immediate risks and vulnerabilities brought up by the pandemic.

The economy faces both COVID-related and structural risks. Real GDP contracted by 9.5 percent in 2020-a much steeper decline than during the Asian Financial Crisis. However, it is now recovering, and macroeconomic fundamentals at the onset of the COVID-19 were stronger than in the late 1990s. In addition, the Financial Action Task Force (FATF) may put the country on the so-called grey list in 2021 without significant reforms on the effectiveness of the Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) regime. However, significant legislative measures were enacted in early 2021 to address some of the FSAP recommendations. The Philippines is also vulnerable to increased typhoon risks from climate change owing to its geographical position.

Stress tests show that while banks can withstand the already severe baseline scenario, they could experience systemic solvency distress if the economic impact of COVID-19 turns out to be severer. The economic shock would weigh on corporate earnings and then spill over to banks. Bank stress could limit credit supply, reducing economic growth noticeably even more. Physical risks from climate change are relevant for financial stability, though the infrastructure destruction from typhoon wind alone is not systemic unless extreme tail events materialize. Higher median and estimated losses were used in the stress testing exercise for severer scenarios.

The Bangko Sentral ng Pilipinas (BSP) has modernized its oversight framework for banks since the 2010 FSAP and shows reasonably good compliance with the Basel Core Principles ( 2020 BCP assessment ).The BSP also plays the central role in macroprudential policy framework given the dominance of banks in the financial system. The 2019 amendments to the BSP charter further strengthened the financial stability policy framework. Nonetheless, material gaps remain on BSP’s legal powers related to conglomerate supervision, and bank secrecy laws are limiting the effectiveness of supervision, but also have wider financial sector implications. At the wake of the COVID-19 crisis, the BSP issued time-bound regulatory relief measures, including unusually strong forms of forbearance related to non-performing loan recognition and provisions, subject to prior notification to and approval of the BSP.

While there has been some progress with reforming financial safety net, a number of issues highlighted in the 2010 FSAP are still relevant. The resolution powers are provided to both Philippine Deposit Insurance Corporation (PDIC) and the BSP, making the resolution process relatively complex, while the prompt corrective action framework could be enhanced by including more specific escalation procedures. The resolution toolkit is largely limited to liquidation and resolution planning and resolvability assessments are not in place yet.


[1] The Financial Sector Assessment Program (FSAP), established in 1999, is a comprehensive and in-depth assessment of a country’s financial sector. FSAPs provide input for Article IV consultations and thus enhance Fund surveillance. FSAPs are mandatory for the 29 jurisdictions with systemically important financial sectors and otherwise conducted upon request from member countries. The key findings of an FSAP are summarized in a Financial System Stability Assessment (FSSA).

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