Amando M Tetangco, Jr: Philippine banking - reaping the rewards from
prudent reforms
Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (the central
bank of the Philippines), at the 2nd Asian Banker Philippine International Banking
Conference, Makati City, 6 September 2012.
* * *
Colleagues in banking, fellow stakeholders, ladies and gentlemen, good morning.
Let me begin by thanking the organizers for holding the 2nd Asian Banker Philippine
International Banking Conference.... When you have a 2nd (after a 1st) you create a
series...It's like the Rocky Series (for those who can still remember), or Harry Potter (to those
of this generation), or Batman Series or the Ipad... the 1st one was a good experience and
you want to have more of the same... The organizers did a good job the first time around...
Today, they again provide a venue for us to take a closer look at the issues that confront us,
as they relate to the Philippine banking system. And, we look forward, perhaps to a broader
Asian Summit in the Philippines at an opportune time in the near future.
Let me therefore now focus on today's agenda. I will not give you a litany of numbers to
prove that the Philippine banking system has remained strong in contrast to other
jurisdictions. The positive performance indicators are quite familiar to you. For instance, you
all know that system resources have been growing, funded by increased balances of
deposits and more loans extended to borrowers.
Let me, however, share with you storylines that are not cited often enough... On the deposits
side, growth was faster in the years after the height of the crisis than the years before.
Between 1999 and 2007, deposits grew a little over 8% per year. But from 2007 - at the time
that the mortgage crisis was already unfolding in the US - Philippine system-wide deposit
balances increased by 13.40% per year all the way to 2011... On the loan side, the numbers
are even more dramatic. Loans have been growing at a 10.62% pace per year in the last
4 years (2007 to 2011) when it was growing by only 3.67% p.a. in the 8 years from 1999.
Add to this, the fact that increased loan portfolio was not a case of liquidity chasing after
every credit exposure. A simple look at the numbers will show that the NPL ratio has actually
been falling since the turn of the century just as the coverage ratio has been rising. For
universal and commercial banks, our latest number is an NPL ratio of 2.06% and a coverage
ratio of 135%.
All of these metrics converge into the capital adequacy ratio which is the central, though not
exclusive, metric under the Basel Accord. The often-cited statistic is that our banks have
consistently maintained, on average, capital ratios well above the regulatory thresholds. On a
consolidated basis, system CAR is hovering at 17%, of which 14 percentage points pertain to
the Tier 1 ratio.
Most will leave the system review to the measures that I just shared. However, it is important
for the BSP to make a point about access to the banking market because financial inclusion
is much more than just a buzz word to us. Today, we have a wider reach not only from the
significant increase in physical banking officers (which surged from 21,394 at end 2007 to
26,057 at end 2011) but also through ATMs (which grew from 7,155 to 10,659 over the same
period) and the active use of technology through our mobile banking framework. Indeed, it
can be said that we now have a wider footprint of banking services that caters to the needs
of our differentiated public.
Ladies and gentlemen, all of these positive developments neither happened overnight nor
happened on their own. We believe that they reflect the enabling environment which we have
invested in with the active support of and coordination with market stakeholders. While we
can itemize each and every circular and policy prescription we have issued, I believe that we
can categorize them into six main areas.
• I would start with governance. This is most critical because without these
overarching guidelines, the conflicts of interest inherent in finance would prove to be
untenable.
•
Risk management comes to mind next because of our deliberate shift from
transactions review to a risk-based supervisory framework.
•
Microfinance and financial inclusion are advocacies which we have pursued well
before it became popular to do so.
•
To complement the prudential framework, there needed to be improvements in the
delivery of banking services.
•
We certainly could not and would not neglect contributing to the development of the
capital market.
•
As the other facets involved direct improvements of market components, we have
not forgotten the needs of the banking public either for redress mechanisms or for
financial education.
Each facet is a critical component without which our prudential framework will have major
deficiencies. Taken collectively, they represent the foundations upon which we envision a
thriving banking market that is responsive to the evolving needs of its public.
This of course begs the question. If we have a prudential framework in place, which appears
to have withstood the most intense of global shocks, is there anything else that needs to be
done? The answer is... definitely, there is still much more that needs to be done. And as in
the past, we look to those of you in the market to join us in the work ahead.
There are, however, challenges. First, the policy questions before us are evolving. Second,
conduct and the performance standards that market participants must adhere to are also
shifting. Then, traditional financial relationships aren't necessarily still true. Finally,
time-honored policy transmission mechanisms no longer seem to hold in the past.
In response to these challenges, BSP has had to realign our own policy framework - to go
beyond considering price stability as a sole objective to one that nurtures financial stability
alongside price stability. We have also had to view banking policy not only from the
perspective of ensuring the soundness of individual banks but also the soundness of the
system as a whole. We are deliberately developing capacity so that we are able to weigh
issues holistically, with the view to achieving the broader objective of financial stability.
Falling from this, we put in place a suitable governance structure. First, we adopted a formal
definition of financial stability to get our work agenda moving. Our definition essentially
focuses on four areas: (1) governance (2) market infrastructure, (3) functioning financial
system and (4) thriving economic growth. These four have to be in place, symbiotic of one
another for stability to be achieved.
Second, to execute this agenda, we created a Financial Stability Committee which I have the
pleasure to directly oversee. With me in this committee are six of our most senior BSP
officers. The work itself is run through specific committees. Key to our success is our
capacity to think of the issues comprehensively even though we are traditionally structured
along the three established pillars of Philippine central banking.
I can tell you right now that making this new paradigm work is not a superficial challenge. We
understand the difficulties this early but we nonetheless persevere. Having the governance
structure in place is certainly not a panacea. We recognize that the work agenda is complex
and far reaching. Key reform initiatives that we have identified include Basel 3, Corporate
Governance, Consumer Protection and Financial Education, Financial Market Infrastructure
and Crisis Preparedness. These initiatives are on our radar screen today in the context of
unifying the prudential architecture of financial stability. None of these is trivial, each one of
these requires a keen eye for details and a broader appreciation of how each interconnects
with another, and each is essential in the pro-active management of any underlying pressure
points that may be brewing.
Let me also say that we do not underestimate how weaknesses in the West will leave their
imprints upon Asia, upon us. Although better off than other jurisdictions, economies in our
region are also experiencing an economic slowdown. Coupled with the deleveraging in
Europe, Asia will feel some of the repercussions, either from re-leveraging, capital inflows
and/or stronger local currencies.
These are not insignificant macroeconomic policy issues and they certainly will be formidable
macro-prudential policy concerns. For us there is that added issue of domestic liquidity that is
building up and looking for suitable outlets. Some say it's a positive problem that is
preferable to the case of liquidity drying up. That may be true, but to central bankers, it is still
a concern, positive or otherwise.
In retrospect, we believe that the Philippine banking system is in a position of strength. Such
strength has been achieved through the reforms that we have invested in the past and
whose benefits have come to fruition. Moving forward, we expect to further evolve with the
needs of the public at large as well as the institutions that we oversee.
Ladies and gentlemen, let me reiterate - there is a role for the market in this framework. BSP
does not expect to do the work alone. We stand not only as your banking regulator or
monetary policy authority. We are your partner, and as in any partnership, we expect the
different stakeholders to bear their proportionate load.
Whether it is in managing financial risks or in exemplifying acceptable conduct in market
operations, the market has a definitive role. Stability is easier to achieve if we consider the
bigger picture and not be shortsighted by our own bottom lines. Capital market development
is certainly a shared responsibility because it is a collective gain. And providing for an
inclusive financial market, with appropriate support for financial consumers, is itself a clear
winning bet for tomorrow.
Together, we have taken what was perennially a difficult financial market situation in the late
90s into an environment that has withstood global shocks. Ladies and gentlemen, today,
OUR market is on every investor's radar screen.
I ask all of you: where do you want this market to be as we hold the 3rd, 4th and
5th Philippine International Banking Conference and perhaps the 1st, 2nd and 3rd Asian
Banking Summit?
I have every reason to believe that we all share the same answers. Let us then do our part
as we lift the Philippine banking system further forward as a responsive platform for the
needs of the Filipino in the Asian, if not global, platform.
Thank you very much.