Amando M Tetangco, Jr: ASEAN integration, change and collaboration
Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the
central bank of the Philippines), at the International Conference and the ASEAN University
Network for Business and Economics' (AUN-BE) 16th Annual General Meeting, Quezon City,
14 July 2016.
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Introduction
It is with great pleasure that I take part in celebrating the centennial year of business
education in the Philippines. There is no doubt that business education has had a significant
contribution to our country and it is therefore most fitting that the business school of the
University of the Philippines is named after no less than a man whose imprint on the
Philippine economy is unquestionable.
Certainly, there are many highlights one can identify in a century of business education,
particularly with a dynamic and colorful history such as ours. But I think these are best
considered in the context of your conference discussions as a fuller perspective is warranted
beyond what I can share in the few minutes of my remarks. Instead of looking back then,
allow me to focus on something that is already looming in the horizon.
I refer to the integration of ASEAN which is an initiative whose extent is comprehensive and
whose ramifications are far reaching. Certainly, this will reshape the landscape of business
within ASEAN and as such, call for a re-focusing of business education so that generations
today and of the immediate future are well-positioned to operate in this market.
Stepping back: the road to integration - lessons learned
However, as we gear up for the possible changes that regional integration could create in our
markets moving forward, it would be instructive to step back and consider the learnings from
our experience on this road to integration. A road that takes us back to December 1997.
From the standpoint of the financial market, the lessons that we take heart are those arising
from the 1997 Asian Financial Crisis and the 2008 Global Financial Crisis.
There are many details, but let me just highlight two: 1) The 1997 AFC reminded us that
cross-currency and gapping risks can give rise to systemic dislocations; and 2) The 2008
GFC taught us - painfully in hindsight - that no one was monitoring the unseen risks of
interconnectedness in the economy. The GFC surfaced the "not-so-apparent" changes in the
nature of macrofinancial linkages, including, among others: 1) the strength and causation of
the feedback loop between the domestic real economy and its financial markets; and 2) the
importance of the risk-taking channel of policy transmission. These linkages were not much
considered or thought of as systemic, but they (in reality) are.
Learning from these lessons, policy makers are now focused on the "systemic-ness" of risks
and how the global reform agenda could be structured to mitigate the re-emergence of such
risks.
During both crises, banks played a central role in defining and disseminating the risks that
nearly collapsed the financial markets. Interestingly, however, economic textbooks continue
to depict banks in their "traditional" role of mobilizing savings and intermediating credit. In
practice, banks are much more dynamic. They adapt to new opportunities that arise,
innovating and creating new products that are seen to increase the value of their individual
franchises. We only need to be reminded of our experience from both the AFC and the GFC.
As regulators, we also have had to make adjustments and broaden our perspective in bank
monitoring and supervision. While our objective remains to ensure that banks operate in a
safe and sound manner, we now know that it is no longer sufficient to simply hold individual
banks to that standard of "safe and sound". We have learned that we need to be cognizant of
how things affect one another.
This is the specific purview of the financial stability agenda. Such a holistic view addresses
the weakness brought about by the fact that banks can only see their own balance sheet and
remain oblivious to how they affect the rest of the system.
The global reforms that we have seen post-2008 are premised entirely on mitigating systemic
risks. The Basel 3 agenda formally covers many more risks than the previous standards and
requires banks to have "higher-quality" capital. Information asymmetries will be addressed by
uncompromising standards on transparency and one can see this in the reforms for OTC
derivatives and repos, among others. New standards on Board responsibilities, in financial
market infrastructures and in financial literacy ensure that stakeholders are aware of the
issues and act accordingly.
Looking forward: global reforms and what these mean for ASEAN integration
All of these standards are discussed and finalized at the global level but they will invariably
affect our approach to regional integration. This is precisely because a single market could
be a source of contagion, the very same risk that became apparent in the crises of 1997 and
2008.
This is not to say, however, that integration should no longer be pursued in light of the global
reforms. This is not the point. The advantages of integration are clear. Transforming
10 ASEAN jurisdictions into a single market consolidates the strength of a growing region
that saves more than the rest of the world and has the vast potential of a young population.
The AEC will facilitate the mobility of labor and capital among the members, Banks that are
designated as QABs under the ASEAN Banking Integration Framework (ABIF) will effectively
extend the reach of one jurisdiction by having "outposts" outside its national borders but still
within ASEAN. The ABIF should also provide a financial highway that can harness the
potential of ASEAN by developing the capacity to clear and settle intra-ASEAN trade and
investments without depending on traditional correspondent banks. All these should hasten
regional commerce and provide the means to parlay the growth of ASEAN, its young and
dynamic retail market with high disposable income and unparalleled saving potential.
But we should also be cognizant of possible downside risks. In this regard, the logical
mitigating factor is effective cross-border surveillance and the ability to take collective but
pre-emptive actions.
Unfortunately, that is not as easy as it sounds. ASEAN member states are at different stages
of financial market development. Furthermore, the 10 jurisdictions may very well respond
differently to the same risk due to idiosyncratic factors in their local markets. Effectively then,
"information" becomes the commodity and how we handle it becomes the value proposition
of the product.
Managing information has its own set of challenges. In this day and age of financial
technology, we take advantage of the expediencies that fintech offers but we still have to be
wary of the cyber-security issues that arise, such as the increasing trend of phishing and
identity theft cases. Cross-border commerce is literally consummated in a few keyboard
strokes, which highlights how the human intervention part of fintech can possibly
compromise prudential standards and create trouble.
Ladies and gentlemen, this is a rich area where business education can take an active role.
Here I refer to your potential in developing and preparing market participants who would
have the requisite financial integrity, which is so crucial to keeping individual financial
institutions and the overall financial system, safe and sound. In addition, it would be
beneficial if you turn your economic research towards deepening our understanding of the
human behavior side of markets. This should help us be more adept at finding the
convergence points among policy intent, market expectations and the eventual outcomes of
market behavior.
The business environment today is certainly dynamic not only because of the usual evolution
of the markets. Instead, the dynamism of the markets is driven by a fundamental shift in the
market architecture. While we all recognize the importance of an enabled environment for the
business community, we cannot afford to concede the overall stability of financial markets.
BSP Initiatives on FS and regional integration
This shift towards financial stability - both as the prudential norm and as it affects regional
integration - requires a broader mindset from all of us.
At the Bangko Sentral ng Pilipinas, we have invested a lot towards the pursuit of financial
stability. We created a high-level Financial Stability Committee at the BSP and thereafter
collaborated with the DoF, BTr, SEC, IC and PDIC to establish the Financial Stability
Coordination Council. Within this ambit, a formal definition of financial stability has been
adopted and there is a continuing assessment of regional integration as a financial stability
issue.
Parallel initiatives are meant to strengthen market governance and risk controls. We raised
the standards on bank capital, clarified supervisory expectations on the management of risks
and enhanced board and management governance protocols. We have actively advocated
financial inclusion and consumer protection, crafting a national strategy in the former and
establishing a formal bank framework for the latter. New guidelines on credit and operational
risks have been issued, with the IT Risk Framework issued several years ago, long before
concerns regarding cyber security came about.
Our active participation in regional forums is with a clear view of pursuing financial stability.
We welcome the challenge of being the incoming Chair of the Working Committee on
ASEAN Banking Integration Framework (WC-ABIF) as well as executing the ABIF Learning
Roadmap which the BSP led in crafting. In addition, we make time to be engaged at the FSB
Regional Consultative Group for Asia (FSB-RCGA) and the EMEAP Working Group for
Banking Supervision (EMEAP-WGBS). Both of these are principally platforms for calibrating
global reforms into the regional context.
I would be remiss if I do not share with you our involvement in the best-practice process of
the OECD International Network for Financial Education (OECD-INFE). It is clear to us that
financial education can better anchor financial stability by providing financial consumers the
means to be well-informed of their financial opportunities. Our work with INFE has in fact led
to the creation of the BSP's Consumer Protection Framework which is a milestone in many
respects.
Final thoughts
On the whole, market conditions remain fluid and this requires constant diligence in
monitoring, evaluating and responding to developments.
While there is much that a century of business education has taught us, we also have to
accept that the change in the market is more than just its landscape. More fundamentally, the
market's dynamics and its architecture- how products, transactions, institutions and
industries affect one another directly or indirectly - have evolved. The very nature of risks
and how regulators approach these risks have likewise seen significant change thru the
years.
All these were the focus of our attention even before the Chinese economy showed
weakness, the US Fed's decision to raise its benchmark rates in December, the subsequent
tightening of market liquidity and well before Brexit. The integration of ASEAN as a single
production base and a harmonized market for banking, securities and insurance products
adds a further layer of market evolution that all of us need to fully appreciate and prepare for.
Indeed, there are many challenges ahead. A century of experience and learnings in business
gives us a solid foundation. But now is the time too to shift gears. We accept that we do not
know everything ahead but we can count on a century of collaboration to move us forward.
Let us not forget that strength is not granted. Rather it is achieved. Reforms such as the
integration of ASEAN allow us to position ourselves within an evolving market, not just for
today but more so for the foreseeable future. The changes that reforms instigate may not
always be convenient, but with the right mix and a healthy dose of collaboration, they will
make us better.
I am confident that we have the capacity and the commitment to build a better foundation for
the future. We accept that change is the norm. Thru cooperation and collaboration, I am
optimistic that the uncertain future can be managed, putting us in an excellent position to
face risks and allowing us to reap benefits.
Thank you and good day.