amando m tetangco, jr : crafting policy in a shifting operating environment speech by mr amando m tetangco, jr, governor of bangko sentral ng pilipinas ( the central bank of the philippines ), at the 2012 finex national conference, manila, 5 october 2012. * * * it is a pleasure to join you on your 44th national conference. finex is unique in our market because you are an organization of professionals – rather than of specific institutions. in your vision / mission statement you declare you are the “ leading national organization of financial professionals and practitioners ”. as such, you represent the financial expertise across several industries. let me underscore the term... “ expertise ”. therefore, it can be said that the “ psyche ” that moves financial markets is determined among your membership. i use the term psyche here to refer to both the “ expert knowledge ” accumulated through facts and figures and the “ raw gut ” that brings those facts and figures to life in the financial world... the trader instinct. the hunt for the gain. the “ animal spirits ” as john maynard keynes refers to. risk taking behavior complicates policy i was reflecting on your chosen topic – “ driving growth and competitiveness through innovation ”. three big words … growth, competitiveness and innovation. at first i thought of how broad the topic was, especially when taken against the very specific mandate of the bsp. and then it dawned on me that because market innovation is driven by your members ’ “ animal spirits ”, this topic squares quite well with the motivation to our work as a central bank … which has to do with the channels of transmission of monetary policy. let me explain. the better known or more familiar channels of transmission of monetary policy are – interest rate, exchange rate, credit, asset prices and expectations. but there is one more channel that is less - talked - about but which has recently become prominent both in the literature and in global real world practice. this is the “ risk taking channel of policy ”, which has gained ground during this prolonged period of low global interest rates. let me illustrate why this has been so. first, the low interest rate environment encourages agents to take more risk than they normally would … just to enhance yield on their portfolio. second, low interest rates affect asset valuations … and therefore modify credit worthiness of some corporates. these in turn encourage the structuring of financial products ( through derivatives ) for

bcbs ) and the financial stability board ( fsb ) have now put in place peer review mechanisms to ensure that national jurisdictions comply with international standards in right measure and spirit. these are in addition to the existing assessments of compliance of jurisdictions to international standards done by the international monetary fund ( imf ) / world bank, under the financial sector assessment programs ( fsaps ). within national jurisdictions, regulators / supervisors and financial sector entities have realized the significance of the compliance function in ensuring good conduct of business at the entity level and facilitating a safe and sound banking system at the systemic level. consequently, assessment of compliance is increasingly being focused on in supervisory oversight. is compliance a specific risk area? 8. the basel committee on banking supervision, in its guidance “ compliance and the compliance function in banks ”, issued in april 2005 states “ the compliance function is an independent function that identifies, assesses, advises on, monitors and reports on the bank ’ s compliance risk, that is, the risk of legal or regulatory sanctions, material financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, related self - regulatory organization standards, and codes of conduct applicable to its banking activities ”. 9. what is the “ compliance risk ” referred to above? is it an independent risk that banks need to manage just as they manage credit risk, market risk or operational risk? is it a subset of another risk or is it simply a function that needs to be performed as part of banking bis central bankers ’ speeches business? in the era of traditional banking business, simple products, and intense regulation, compliance was relatively simple. banks had to comply with the provisions of the specific acts and regulations set by the regulators. compliance then could be identified simply as a function to be discharged as part of business. however, with globalization, liberalization, increased adoption and integration of it in the business processes along with the introduction of new, innovative and complex products, the compliance function has gained in stature and significance. while compliance may still not be considered an independent “ risk ” function, over the last few years, it has definitely evolved as an independent function in banks that impacts other risk / s. 10. compliance is generally considered to be a part of operational risk. under basel ii, operational risk is defined as “ the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. this definition includes legal risk, but excludes