managing (inherently risky) banking markets: the ... filebangko sentral ng pilipinas 1) banking is a...
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Bangko Sentral ng Pilipinas
Managing (Inherently Risky) Banking Markets:The Experience of the BSP
Nestor A. Espenilla, Jr.Deputy Governor, BSP
SEACEN-Bank IndonesiaHigh Level Seminar for Deputy Governors
Bali, Indonesia December 2010
Bangko Sentral ng Pilipinas
1) Banking is a business of leverage and gaps. It is inherently risky but, if managed, is value-enhancing.
2) Banks lend more when economic conditions improve. Thus, bank credit is pro-cyclical by nature.
3) Financial governance is a shared responsibility between the banks, the public and the banking supervisor.
4) The banking supervisor must be the one to define the prudential framework while interacting with others.
Our Working Premises
Bangko Sentral ng Pilipinas
The capacity to mobilize and then intermediate saving is the minimum benchmark
When the banks’ balance sheet expands during periods of stress it suggests resilience
-1,000.0 2,000.0 3,000.0 4,000.0 5,000.0 6,000.0
2000
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Loans, Gross (net of IBL) Deposit Liabilities
Bangko Sentral ng Pilipinas
Capital remained consistently high even when the balance sheet was expanding
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Despite the extent of leverage, the balance sheet expansion occurred while the quality of the banks’ balance sheet clearly improved
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Financial Inclusion and Financial Learning have been hallmark advocacies.
Our inclusion program has recently been adjudged as among the best in the world
Bangko Sentral ng Pilipinas
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2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
End
-Sep
'10*
PhP Billions
Loans, Gross (net of IBL) Deposit Liabilities
Bangko Sentral ng Pilipinas
Terminology and Practice
• Terms like financial stability, macro-prudential and micro-prudential have been in use since the aftermath of the 1997 Asian financial crisis
• Recent work by the BIS study group on Corporate Governance and Financial Stability shows that
a) There is no universal definition of Financial Stabilityb) Current monitoring tools have been designed for specific
reasons … but macro-prudential indicators in a financial stability context have yet to be defined
• We need to contextualize the monitoring of banking behaviour to extend to its systemic implications
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A Fundamental Concern
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• Capital• Asset Quality• Management• Earnings• Liquidity• Sensitivity to Risk
? CAMELS? Is CAMELS appropriate
for the system as a whole
? Are all the relevant risks covered
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Financial Market
Real Market
• Liquidity is central to what banks do
• Liquidity has micro and macro facets
Policy Handles
If Leverage is Impt … so is Liquidity
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If Leverage is Impt … so is Liquidity
1) Tenor matters
2) Pricing matters
3) Timing through the business cycle matters
4) Distribution matters
5) Risk appetite matters
Liquidity is not just about volume . . .
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Risks Need to be Properly Measured
• Standard categories of risks – Credit, Market, Ops –are necessary but not sufficient
a) Pillar 2 risks are importantb) In practice, risks are seldom stand-alone
• Risk models are meant to be simplified representation of market dynamics
a) Model parameters need to be re-calibrated for a particular market situation
b) The integrity of the model ultimately rests with the users of the model
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The Challenges of Supervision
1) The “new normal”
2) Banks prefer the certainty
3) We need to analyze risks bettera) Better use of modelsb) Systemic risk
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The Challenges of Supervision
4) Liquidity will be key
5) Role of bank supervisors in financial stability
Bangko Sentral ng Pilipinas
The Challenges of Supervision
1) Enabling the new environment
2) Shorter phase-in period for changes
3) Sharper and broader analysis of risks
4) Key role of liquidity risk
5) Financial stability mandate