MANILA, Philippines - Amendments to the central bank charter that would give the institution additional powers of surveillance over banks and its sister companies is “critical” for financial stability, the International Monetary Fund said.
“That’s critical... that’s a very important aspect and most countries have that actually,” IMF resident representative Shanaka Jayanath Peiris told reporters.
“The lesson from the global crisis was that there should be a regulator with powers to ensure financial stability, to cover and avoid regulatory gaps, and to be able to look at institutions including financial and non-financial entities,” he continued.
Peiris was commenting on the Bangko Sentral ng Pilipinas’ proposed amendments to the New Central Bank Act of 1993 aimed at strengthening the institution’s monetary and financial stability mandates.
The said amendment is deemed important in order to trace where bank loans go to or if these funds are being granted as fresh loans by the borrower. This will help the BSP assess the risks faced by the banks if the end-borrower does not pay the firm that originally received the loan from the bank.
“From the global crisis, we learned that not knowing was the problem but also you need the power to act as well,” Peiris said.
“So first you need to enhance the monitoring which also partly being done but you also have to have the legal mandate for it if you need to act in the future,” he added.
The global financial crisis of 2008, which dragged down markets around the world, was believed to have been a result of “widespread failures in financial regulation and supervision,” as stated by the US Financial Crisis Inquiry Commission.
“It’s definitely clear that we need regulators with broader coverage. Philippines is a country where corporate leverage has increased like many emerging markets and that also causes reason you should monitor it closely so the timing is appropriate,” Peiris said.
Earlier this month, BSP Governor Amando M. Tetangco Jr. stressed the need to look into transactions of banks with other affiliated firms.
In particular, he pointed our banks belonging to conglomerates so as to see the “interlinkages” between the banks and its sister companies, and the systems in place to manage the risks.
This is explained further by BSP Deputy Governor Nestor A. Espenilla Jr., who last week pointed out what the central bank wants is to look at the “transaction flow” when the banks loan out to their sister companies.
“It’s not looking into the books of the conglomerates themselves but what we’re interested in is the transactions they do with their banks,” Espenilla told reporters.
He cited for example that when a bank grants loans, the central bank wants to see where that loan would be deposited, when it would be withdrawn, and when it would be injected as capital into another firm.
“The flow is what we’re after because right now, we have very limited abilities,” Espenilla said.